In our Supply Chain Matters commentaries focused on the challenges that are currently impacting consumer goods industry supply chains, we have called attention to the damaging effects that certain investor activism efforts have inflicted through mandates to either dramatically reduce costs, shed underperforming brands or consolidate CPG companies.
To clarify, an objective investor voice demanding excellence is and should be expected. Insuring shareholder return is always an important business outcome objective for supply chain initiatives and transformational activities. However, when that voice comes in the context of demands for short-term results regardless of consequences that is far different challenge. Years of transformational efforts can literally be destroyed by the effects of wholesale cost cutting mandates.
In our Twitter stream, we came across a re-tweet link from Huffington Post blogger David Weaver, referencing United Kingdom’s Daily Mail.com posting: The supply chain bullies: The giant household names that stand accused of hurting small suppliers. The commentary describes how consumer goods giant Heinz has doubled the time it takes to settle and pay supplier invoices imposing upwards of a 97 day wait for payment. Similarly, AB InBev is reported to have routinely taken up to four months to pay its suppliers. These payment terms are written into supplier contracts and according to the commentary, most suppliers have little influence for pushing-back. It is a literal pay to stay practice. The commentary cites one source as indicating that a staggering £46 billion was overdue to suppliers in 2014.
While larger sized suppliers may have the financial means to borrow additional funds or adsorb such impacts, it is far more challenging for smaller suppliers who obviously lack such leverage. Once more, because of such practices, the EU community issued a prompt payment directive in 2011 requiring supplier payments within 60 days. As the commentary’s title implies: “It is a total abuse by certain large companies of their supply chain.”
We commend the messages of the Daily Mail commentary and would add that it further serves as a de-valuing of supplier relationships and needs for co-innovation. During the severe global recession that began in 2008-2009, there were continual reports of large companies tending toward such practices to preserve cash, causing some suppliers to financially succumb. It is literally throwing your problem “over the wall” to make your supplier your banker. Today, while the Eurozone sector continues to struggle to bounce back to growth from the same great global recession, news of such continuing practices is disheartening.
Disappointingly, it continues to be a practice that spans other industry supply chains, ones that have far higher margins.
As a community of supply chain analysts, we often echo the superior rankings of certain supply chains because of their extraordinary financial ratios or the productive benefits of advanced technology applied to procurement and other supply chain focused business processes. However, neither superior financial metrics nor advanced technology application be predicated on passing the burden of cost down the subsequent tiers of the supply chain in order to secure even more short-term financial benefits. After all, that’s the far more-easier approach. Ignoring any longer-term implications, collect your performance bonus and moving on to the next short-term challenge or promotional opportunity seems to be a continuing norm, and that remains tragic.
We want to hear from our readers. What’s your view on why such practices continue? Is it out of the control of supply chain senior leadership or a manifestation of today’s leadership?
Bob Ferrari
