Commentary: A new supply-Chain crisis is building

Barrons

About the author: James H. Gellert is chairman and CEO of RapidRatings, a financial health data and analytics company.

Those expecting a quick end to the supply-chain crisis are going to be sorely disappointed. 

Port back-ups, trucker shortages, factory closures, and shortages of raw materials are huge contributors to this current wave of the crisis. But a second wave looms on the horizon. This wave will be harder to identify, and too many companies are focused on just the current crisis without appreciating the risks of what’s coming next.  

Viewed broadly, public and private companies across the globe reduced short-term risk during the pandemic by adding cash, and debt, to their balance sheets. Despite taking this step, many took on more risk from a long-term perspective. How does this happen? In these cases, companies’ underlying businesses might improve while the cash lasts, but if they don’t, they must get more liquidity to buy more time. If companies can’t resolve their debt problems, they either fail or begin to cut corners that create unseen problems for their customers.  

Financial failure of a supplier is never good, but at least it’s often clear-cut. A supplier’s degradation can be more insidious, creating risks that are harder to see, but that are costly and potentially critically damaging to its customers.  

Wave two of the supply-chain crisis will come from suppliers that are profoundly degraded by the challenges of the past 20 months, where operational, reputational, and financial risks are being introduced to their customers downstream. It will happen when companies cease being able to Band-Aid over problems with cheap and historically easy to access capital.  

Here’s how it will play out.

A supplier that cuts corners in IT spend may create cybersecurity risks for its customers. One that delays products or reduces R&D spending is less innovative and responsive to a customer’s own…