By many measures and in many industries, supply chains are stable, inventories have normalized and profitability has improved at large companies.
But under the hood, the finances of many smaller companies in the supply chain are still hurting — and in fact are in worse shape than before the pandemic began.
Since 2019, private middle market companies — which make up the backbones of supply chains — have filed for bankruptcies as much as four times more often large companies, according to research that RapidRatings, a financial analysis firm that tracks supply chain risk, performed for investment firm Marblegate Asset Management.
The firm also found that from 2019 through 2022, EBITDA declined by over 20% at middle market companies. Meanwhile, EBITDA rose by 20% at large public companies.
Companies’ financial and operational health has worsened in several key industries. In aerospace, for example, RapidRatings’ Core Health Scores (CHS) — which measure operating and structural efficiency based on over 60 financial ratios — for private companies fell nearly 29% on average from 2019 to 2023, according to RapidRatings data provided to Supply Chain Dive.
The deteriorating health of smaller, private companies in the supply chain
| Industry | Core Health Score (2023) | Score change since 2019 |
|---|---|---|
| Aerospace and defense | 40.7 | -28.7% |
| Automotive | 35.9 | -25.7% |
| Retail | 39.5 | -15.8% |
| Transportation | 61.3 | -3.2% |
Source: Rapid Ratings. Note: Core Health Scores range from 0 (unhealthiest) to 100 (healthiest), and measure operating and structural efficiency based on over 60 financial ratios.
“You are seeing common themes,” Rapid Ratings Executive Chair James Gellert said. “Their profit margins are being squeezed. Their capital costs are increasing. Short term debt as a percentage of total is, generally speaking, growing — meaning they're coming closer to their maturities.”
The score changes are far less dramatic for large publicly traded companies, which often make up the downstream buyers and brands. In some industries, including retail and transportation, the CHS metric has improved overall since the pre-pandemic era.
Larger, public companies have fared better through disruption
| Industry | Core Health Score (2023) | Score change since 2019 |
|---|---|---|
| Aerospace and defense | 38.6 | -17.7% |
| Automotive | 44.7 | -6.9% |
| Retail | 53.6 | +5.1% |
| Transportation | 58.9 | +6.7% |
Source: Rapid Ratings. Note: Core Health Scores range from 0 (unhealthiest) to 100 (healthiest), and measure operating and structural efficiency based on over 60 financial ratios
Buyers are pressuring suppliers
The two outcomes for each group are likely at least partially related.
“It's clear that in the same industries or in the related industries — meaning the supply chains that make up the downstream companies — there's pressure being put on smaller companies by the larger ones,” Gellert said.
For suppliers and others in the supply chain, some of that pressure is felt in day-to-day operations. “They're often talking about things like, ‘I can't get my SKUs set up three quarters in advance, because I'm not getting as much visibility into my customer’s buying needs or with the same lead time as I used to get,’” Gellert said.
In industries such as retail, some large companies cleaned up their operations and income statements in the difficult demand environment of the past two years while shifting operational and financial risk downstream.
Some retailers and brands canceled orders and pulled back on purchasing when faced with inventory overages. Apparel manufacturers in Bangladesh, for example, told researchers last year that large buyers were canceling orders and using economic conditions as a pretext to drive prices down, all at the expense of suppliers.
Taking an active approach to risk management
The financial environment is also weighing on supply chains.
“You keep going deeper and deeper into those companies away from the commercial side, and you've got all of this other stuff,” Gellert said. “‘How are we financing ourselves? Are we investing enough in research and development so we can continue to be innovative? Do we have pressure from our investors? Do we have private equity shareholders that are five years in and looking for an exit at almost any price? Do they want to merge us with somebody?’”
Large, publicly traded retailers often have deeper financial resources and can get better borrowing rates than smaller companies, another reason why Gellert thinks they have fared better since the pandemic.
When suppliers do buckle under financial pressure, it creates problems throughout the supply chain. As Everstream put in a 2023 supply chain risk report, “small-business closures don’t often get much attention, but they will catch many companies by surprise this year, creating a bullwhip effect that could halt production.”
For buyers, managing risk is in large part a matter of managing supplier relationships. Sharing information is critical, but so is a collaborative approach.
Gellert points to mature companies that support their suppliers financially when they need help, such as by offering faster payment terms and financing programs, or purchasing commodities for them.
“There are companies that have managed their suppliers at arm's length and very transactionally,” Gellert said. “And they're the ones who don't have resilient supply chains — because there's no bond built. Collaboration between corporate entities is key to having sustained critical relationships.”
