The Wall Street Journal today reports that Procter & Gamble is planning to extend its payment terms to suppliers by as much as 30 days — from an average of 45 days to a new target of 75 days.
The Journal reports that P&G was following the lead of many other large companies that were keeping their cash longer to help them fund expansions, investor dividends or other needs.
Of course, payment terms have been and always will be an important part of the total cost of ownership of anything in the supply chain. They are tools like many others. But as one of the sharpest of those tools, payment terms can cut two ways.
You may be comfortable that your tier one supplier can find funds at low interest rates to manage the situation without affecting deliveries to you or the overall health of the supplier. But the fact is, the more likely scenario is that tier ones will extend their own terms to tier two, and so on. Eventually, the shock of the change has to be absorbed.
How well do you know the financial health of every company at every level in your supply chain? Can you be sure there isn’t a service provider in your chain that has to meet a biweekly payroll, or some other upstream company that supplies a critical part on a razor-thin operating margin because it’s a startup or has put everything into an R&D effort? If so, you might be sowing the seeds of disaster at the same time you are harvesting what appears to be an easy source of cash.
Tag Archives: risk management
No big surprise to anyone who has been baking in record temperatures and drought conditions anywhere in the central part of the country, but today’s US Dept. of Agriculture food price forecast projects increases in the range of 2.5 to 3.5 percent for the remainder of 2012, and uncertainty about the full effect of the drought.
If grain or livestock is a category you source, are you prepared for “drought shock?”
How about the short term dip in beef prices as farmers sell off stock rather than pay higher costs for feed?
Here’s an interesting analysis of sourcing from China from an interesting point of view — the real estate investors who own manufacturing facilities across the United States.
National Real Estate Investor – Made in America Again
The authors refer to a study by AlixPartners that projected the gap in manufacturing costs between the two countries will essentially close in another three years — based on wage inflation, exchange rates and freight costs. That same study also pointed out that between 2005 and 2008 the cost gap had shrunk from 22% to 5.5% between the two countries.
The speed at which China is “catching up” is also catching many analysts by surprise, but it also points out that the China “equation” is not really an equation. An equation represents a balance, whereas the situation in China is very dynamic. Sourcing from China has never been simple; it has always required careful analysis of costs and risks, and one of those risks has always been the fluidity of the situation. Right now, for instance, the Communist Party has been shaken by the purge of a senior official and potential criminal charges against his wife even as it is poised to make a huge transition of power to new leaders. It’s impossible to predict what impact that will have as it plays out.
At the same time, as we consult with companies operating in China we are finding many of their employees are excellent students of supply management. They are enthusiastically embracing best practices, and it’s clear they are not just focusing on exports to other countries, but creating supply chains to serve China’s own huge and growing appetite for consumer and business products. Will this drive new efficiencies and innovations that U.S. companies will want to purchase? Or will it fuel demand that will put upwards pressure on prices?
China is so big, and changing so fast that the answer is most likely, “yes.” To both.
Last year the global auto industry was caught by surprise when the Japanese tsunamis knocked out the factory that makes a black paint pigment used by several car companies.
This week it’s deja vu all over again, as The Detroit News reports that an explosion in a single factory in Germany likely has disrupted 50% or more of the supply of a critical resin used in brake hoses and fuel lines by all three U.S. automakers. The News reports that 200 engineers, purchasers and others gathered outside of Detroit to figure out what to do next.
It turns out that the explosion at the Evonik Industries AG plant in Marl, Germany not only produces 25% of the world’s supply of nylon-12, a petroleum resistant resin, it also supplies a critical chemical building block used by suppliers of another 25% of nylon-12. With automotive production up in the U.S., global inventories of the resin could run out in quickly.
Now, it does show progress that the industry responded quickly after the accident to sort out alternatives, but it’s still shopping for an umbrella after you’ve already been caught in the rain. If the OEMs had thoroughly mapped their supply chains before this happened, they would have seen the big red “X” where all fuel hoses and brake lines led back to Marl. And that should have led them to formulate risk mitigation strategies that could be implemented the moment the news of the explosion hit Twitter.
When something goes wrong deep in your supply chain — you can never find out the precise source of the trouble too fast, or in too much detail. Time spent creating a chain of custody is well spent when a crisis breaks. Even when the problem is minor, it can have a big impact. Case in point: according to “Baking Business,” Jeff Sobell, senior manager, global packaging, Kellogg Company, Battle Creek, MI, recently told a panel at Pack Expo that the company’s quarterly net income dropped 15% last year when it had to pull 19 million cereal boxes from stores shelves because the packaging had an odor.
He was making a point about how important packaging standards are to food products, but there’s also a lesson there for a tight chain of custody. Kellogg is a global corporation and an industry leader in supply chain practices. However, this relatively minor issue that had no impact on the quality of the product inside the boxes, nevertheless, hit Kellogg’s bottom line. I am pretty certain Sobell mentioned the case only because Kellogg had learned from it. You can, too.
What a turnaround to the phrase attributed to Henry Ford that you could have a Model T in any color “as long as it was black.” Ford Motor and others have found themselves telling dealers you can have vehicles in any color except black. That, of course is a result of the earthquake and tsunami that damaged Merck’s Onahama, Japan plant. According to Automotive News, “the only plant worldwide making its Xirallic metallic pigment.”
While Merck scrambles to restore production there or elsewhere, companies are rapidly changing strategy away from single sources to dual sourcing. Primary and secondary sources are a quick fix to SC risk.
A survey of 168 Senior Financial Executives reveals that the top three concerns are:
- Financial exposure
- Supply chain logistics disruption
- Legal liability/harm to reputation
The survey shows that supply chain risk management is very high on Senior Management’s agenda. Supply Chain Executives should place a high priority on assessing and managing the risks across the entire supply chain. Companies have significantly reduced capacity during the downturn and are not adding it back any time soon. The survey was the result of CFO Research Services and Liberty Mutual Insurance Company.