Pinching a Rose

What’s in a name? That which we call a rose, by any other name, would smell as sweet-William Shakespeare

The Wall Street Journal recently published an article titled P&G, Big Companies Pinch Suppliers on Payments, which discusses Procter and Gamble’s effort to optimize supplier payment terms. The article highlights a useful strategy which companies can employ to generate shareholder value while at the same time strengthening the financial health of their supply chains. Unfortunately the article is inappropriately titled and, more importantly, buries the lede.This is a great move by P&G. According to the WSJ article, P&G lags industry standards on payment terms. Catching up will generate $2 billion in Free Cash Flow (FCF). That’s clearly a big number. To put that in perspective, given P&G’s FCF margin, P&G would have to sell an additional $18 Billion in product to generate $2 billion in Free Cash Flow. P&G’s management team would be derelict in their duty to shareholders if they did not execute against this opportunity to get in line with industry standard payment terms. They key here though is that P&G is doing this in a collaborative way based on industry benchmarks, individual supplier characteristics and the use of Supply Chain Finance (SCF) technology and services. You can see the letter to suppliers from CPO Rick Hughes here. SCF gives suppliers the ability to take early payment at a low discount rate based on P&G’s credit rating, not the supplier’s. This offsets some or all of the negative economics to the supplier. By offering its suppliers a multibank Supply Chain Finance technology platform, P&G can improve its Free Cash Flow and reduce total cost in the supply chain rather than just shifting costs.