The Small Business section of The Wall Street Journal published a concerning article this week, namely that Big Customers Are Taking Longer to Pay their suppliers. (paid subscription or free metered view)
As was the case during the 2008-2009 global recession, the extension of time to pay suppliers, especially small and medium-sized businesses, places them in ever more challenging needs to finance working capital.
The article cites an Experian-Moody’s Q1-2012 benchmark report that indicates that businesses paid their suppliers an average of 7.6 days past due, a 14.1 percent increase from the same period last year. The National Federation of Independent Business surveyed 850 businesses, of which, 64 percent indicated having invoices unpaid for at least 60 days, and 20 percent indicating delinquencies are getting worse. The article provides some specific examples. Number one rated supply chain, Apple was reported as paying in 52 days, up from 43 days, while Wal-Mart pays on average at 29.5 days, up from a previous 27 days. Ford indicated that 80 percent of its annual purchases are paid within 40-45 days.
As smaller suppliers can well testify, increased time to be paid by very large customers implies financing working capital levels for longer periods. It also implies added challenges in the flexibility to hire additional workers. The current trend is troublesome because smaller businesses cannot garner attractive borrowing rates from lenders. The article notes that while large enterprises can borrow at an average of 3.35 percent, small-business loans are often in double-digits, and can range from 6 to more than 20 percent.
As the financial crisis involving the Eurozone continues to concern economic leaders, this trend of taking longer to pay suppliers is obviously disturbing. We noted a recent example of a key Spainish based supplier to Boeing. Large customers continue to seek the best price for supplies but by extending payment cycles, place these same suppliers in ever more difficult positions. It seems that memories run short, given that just a few years ago, large numbers of smaller suppliers were forced into financial peril or bankruptcy because of these practices.
Supply Chain Matters reminds senior procurement leaders and their respective Chief Financial Officers that a comprehensive supply chain risk mitigation plan includes payment practices among direct material suppliers. If lean, demand-driven supply chain planning and operational practices are to be maintained, suppliers need to be assured that they can expect to be paid in a timely and consistent cycle. In times of high uncertainty, businesses large and small will obviously explore means to preserve or accumulate additional cash. When your business feels the pressure of working capital or cash management challenges, you bring on added risks with a one-dimensional perspective of my cash vs. that of a supplier. Remember what has occurred in the past, as well as the burden involved in re-qualifying or added sourcing of new suppliers.
A supplier partnership for direct materials is exactly that- a partnership! It is an extension of your value-chain.