Necessary Medicine?

A spoonful of sugar helps the medicine go down- Mary Poppins

Corporates continue to garner bad press for increasing supplier payment terms. Companies such as Dell, Vodaphone, Diageo, AB Inbev and Unilever have all been criticized in the press for extending their payment terms to between 60 and 120 days (though I suspect they’ve been cheered by investors). They’re far from alone in extending terms though. According to CFO Magazine, 94% of firms said their customers were leaning on them for extended payment terms last year. It’s no secret why firms are looking to extend supplier payment terms. A typical Global 2000 firm can generate $100 Million or more in incremental cash flow. This supports key asset efficiency metrics such as a return on Invested Capital (ROIC) and Economic Value Added (EVA). In fact, if a company has lower DPO than their competitors, they’re effectively subsidizing the cash flow of those competitors. But why the consternation about terms commercially agreed between an organization and their suppliers? Why the rhetoric about the “morality” of various payment terms? There’s no such concern regarding a whole host of terms agreed between buyer and supplier which includes everything from pricing to merchandising allowances. The reason for the angst – cash flow is the lifeblood of business and negatively impacting supplier cash flow can put them out of business, especially in today’s environment. Companies can avoid the negative impact of term extensions on their supply base, and the morality play, by collaborating with their suppliers around cash flow much as they do on the physical end of the supply chain around inventory flows. By using a supplier relationship management tool like Supply Chain Finance, the impact of term extensions on suppliers is minimal. When combined with SCF, suppliers can improve cash flow despite the term extension. Even with a 15 day term extension, the most financially vulnerable suppliers will actually reduce costs with SCF. Further, the cash flow the buyer gains from the term extension can be invested in the business which ultimately helps the supply chain. Do large buyers leverage there bargaining power (sometimes known as bullying!)? Sure, their shareholders demand it and it’s not going to stop. However, by introducing a more collaborative approach around payment terms with Supply Chain Finance it doesn’t have to be a zero sum game.