Tag Archives: payment terms

Suppliers financing customers: where is the line drawn on Corporate Social Responsibility?

money wrestling

This week I read the New York Times news item “SYDNEY — Rio Tinto, one of the world’s  biggest miners has doubled its payment terms in a move that will force embattled suppliers to wait up to 90 days to be paid.” Can these suppliers survive? Update: On April 14 Rio Tinto announced it is dropping plans to extend supplier payment terms.

This is a great example of leveraging suppliers who, themselves, have invested in facilities, employees and inventories in the most remote corners of the globe just to support the customer. In an article The Unsuitability of Extended Payment Terms, Raz Godelink highlights that major food producers like Mondelez, Mars, Kellogg’s, Church & Dwight, Anheuser-Busch In Bev and Heinz extend payments to suppliers from 90 to 120 days. In many cases the suppliers to the food industry are agricultural industries surviving crop-year to crop-year. This industry requires capital to acquire the seed, fertilizer and equipment, which is all at risk in volatile commodity markets.

Stephanie Strom’s NYT article Big Companies Pay Later Squeezing Their Suppliers points out that companies like Mondelez are using the cash for a stock buyback initiative. Kellogg’s is financing a restructuring project and P&G has added significantly to its cash flow. The end result is a cash poor supply chain that cannot withstand interest rate hikes or another financial crisis. We have been fortunate the past few years that money has been virtually free, enabling this practice. In the long term, I believe it’s not sustainable and many of the smaller suppliers in many supply chains will be in trouble should conditions change.

I have to admit, reading those articles caused me to flash back to that July day during the last recession when I was on the phone with a Fortune 500 customer who hadn’t paid invoices dating as far back as November for work done according to the contract. I couldn’t tell my employees that they I couldn’t pay them because the customer hadn’t paid, so I maxed out the business line of credit and borrowed the max on my house to pay salaries and bills for the business. On that July day, the customer’s project manager was telling me that I would be paid the following week if I would discount the fees owed. I had little choice but grant a discount at the time—credit was extremely tight and we were owed a lot of money. By the way, the payment terms for this client were 90 days, plus I had 3 other clients who had moved to 90 day terms, so having a customer stretch payments as much as 180 days was a true crisis. I’ve never forgotten this $1 billion+ company using my small business as the bank.

Companies often cite Corporate Social Responsibility as a key part of a sustainability program. I believe cash-starving the suppliers who extend a company’s capability is irresponsible. It starves investment, innovation, growth and quality; how sustainable is that?

Are you requiring suppliers to act like a bank?

Why I Worry About Interest Rates (And Maybe You Should, Too)

broken chain

The latest U.S. employment report seems to have given the Federal Reserve a strong signal to bump interest rates after it failed to do so in September. Employment increased by 211,000 people following a gain of 298,000 in October that was bigger than previously estimated, easing concerns that manufacturing activity is slowing.

While the interest rate increase is expected to be modest, it will have an impact on procurement activity and supply chain finance. Before looking at the impact of raised interest rates, let’s look at the impact of reduced loan availability a few years ago and extended payment terms–stretched from 90 to 180 days in some industries. These extended terms have fueled a booming factoring market where suppliers sell their receivables at discounts that are far higher than loan interest rates to maintain cash flow. Not only is the sustainability of this practice in question, but it becomes difficult for a company to compute true days sales outstanding. So, can the supplier who factors or the buyer who relies on liquidity calculations as part of risk management really know where the company stands? Higher interest rates will not help a company stop this sell-receivables-today-to-fund-new-sales-production cycle.

We have become comfortable with low cost money and when that cost is increased, it will have a serious impact on low margin, high volume suppliers who are essentially financing the supply chain for the end customers. Labor costs will likely be impacted as the cost of credit cards, hard goods, homes and automobiles carry the increased interest rate cost to the consumer and workers will look for higher wages.

While the interest rate hike will not be a surprise, the market change from a buyer’s market to a seller’s market may catch some procurement and supply chain professionals by surprise, who in many have not lived through periods of inflation and increasing prices.

While I hope that the impact is minimal, I am advising all of my clients to complete a financial risk assessment of their supply chain, dust off cost containment processes, retrain their teams and review all contracts.

In times of uncertainty, its always best to drive a proactive approach.