A strike has hit the East Coast Port in the United States, and it’s expected to send major shockwaves through the nation's economy, with an estimated daily impact of $5 billion. While consumers will undoubtedly feel the pain, the most significant repercussions will be felt upstream by suppliers, who are already operating on thin margins due to rising costs and high interest rates.

The strike's timing couldn't be worse for suppliers. Over the past three years, middle market companies (which make up 75%+ of supply chains for large corporations) faced a dramatic decline in profitability and a surge in debt.

In 2023, middle market companies experienced:

• Declining Profitability: Operating profits have plummeted by 38%, and net profits have declined by a staggering 233%.
• Rising Debt: Total liabilities have increased by 45%, and interest coverage has declined by 73%.
• Struggling Cash Flow: Approximately 25% of these companies now have less than 1x interest coverage, meaning they are unable to cover their interest costs this year.

And while interest rates are coming down, it won’t be fast enough to reverse the operational strain most suppliers are currently under. Undoubtedly, the strike will exacerbate these challenges.

As suppliers grapple with disruptions and delays from the strike, they will likely experience increased costs, reduced cash flow, and operational setbacks. RapidRatings conducted an inventory stress which revealed the financial impact on the middle market that comes from the extension of holding inventory:

• ‍15% increase in inventory days: 5% increase in inventory cost‍
• 25% increase in inventory days: 10% increase in inventory cost

These findings highlight the significant financial burden that inventory disruptions can place on struggling businesses.

Moreover, we are seeing financial challenges specifically hit industries. Boeing workers recently went on strike, and the repercussions are expected to impact Aerospace and Defense suppliers hard during a time when these businesses are already experiencing pain.

Take a look at the risk concentration of Aerospace and Defense suppliers as measured by RapidRatings:

• Aerospace Product and Parts Manufacturing: While this sub-industry accounts for only 6% of the total supply chain, 36% of these companies are in the high-risk and very high-risk categories (an FHR® of 40 and below on our 100-point scale).
• Electrical Equipment, Appliance, and Component Manufacturing: This sub-industry makes up 5% of the A&D supply chain, but almost 25% are rated high-risk or very high risk.

These sub-industries cannot absorb the effects of a strike when they're already operating at heightened risk levels, which trickles down to the broader manufacturing world and global economy.

While the East Coast Port Strike is a major blow to the U.S. economy, the most severe consequences are going to be felt by suppliers. The ripple effects of this disruption could have long-lasting consequences, affecting businesses, consumers, and the overall health of the global supply chain.

In light of this precarious situation, it is critical for businesses to proactively monitor the financial health of their suppliers and take steps to mitigate supply chain risk. Utilizing tools like the FHR can provide valuable insights into the financial stability and resilience of suppliers, allowing companies to make informed decisions and identify potential vulnerabilities. By prioritizing proactive risk management strategies, businesses can be better prepared against disruptive events and protect their supply chain.