You would think that one of the lessons from the destruction of Ford, GM, and Chrysler (ok, GM and Chrysler) would be that you can't beat up your suppliers and then expect them to support you when times got tough. Unfortunately that hasn't happened, and the practice of supplier abuse continues to increase.
The art of demolishing a critical part of the supply chain usually takes two forms:
- Requiring an arbitrary price decrease under the guise of "partner with us so we all succeed."
- Stretching out payment terms to way past traditional net-30.
I'm battling the price issue every day, even in a niche high technology market. I'm especially chagrined when the request for an arbitrary 10% or price decrease comes the same week as the news that the customer's CEO has received a record bonus. Yes, "partner" with me. Luckily I can say no, and I continually review pricing to ensure it reflects the value I deliver. I also continually invest in projects to reduce cost and increase value to my customers, and I share that increased value. Similarly I must always ensure I'm delivering the value to support my prices in the face of increasing competition. Price is not value. The funny thing is that the commodity managers and purchasing agents at my customers understand this, but their directors and VPs seem to have no clue. I bet they all have MBA's…
Now we learn that companies, especially larger ones with some bully muscle, are pushing hard to stretch payment terms. I've had many of those "requests" as well, and again luckily I'm in a position to say no. If they continue to want my single-sourced relatively inexpensive component that goes into their very expensive product that creates huge margins, then pay me on time. Unfortunately many other smaller companies aren't so lucky.
Large corporations are tightening the screws on their smaller
counterparts as the credit crunch intensifies companies' efforts to
hold on to their cash. In an example of corporate Darwinism at
work, the recent round of quarterly earnings results showed companies
with annual revenue of more than $5 billion sped up their collection of
cash from customers while slowing their own payments to suppliers.
Yes, "Darwinism"… or bully tactics depending on your perspective. What's the advantage?
True… once. It's not a recurring benefit. Dropping cash to the bottom line in this fashion is sort of like the benefit of making your January mortgage payment in late December in order to capture the interest for tax purposes in the current year instead of next. Next year you also have to do it just to keep twelve months of interest in the tax calculation. Sure there may be interest paid or opportunity lost in having some additional cash tied up, but as lean types know, value is not always reflected on a traditional P&L or balance sheet.
There are other, far more serious consequences to stretching out payments to suppliers.
Uh, yes. And I bet there's some value in having a secure, robust supply chain. Right? Or how about having a supplier so excited about working with a valuable customer that the supplier is willing to invest in new technologies and methods to create a competitive advantage for the customer?
That would be true partnership.
This supplier relations video is priceless!
Jason Morin says
We’ve seen the payment terms stretch beyond belief in my industry (fortunately our finance team doesn’t always agree to them). Net 30, Net 45, Net 60…I’m waiting for the next RFP from a potential client to read “Net-Whenever We Feel Like Paying You”.
Mark Graban says
The same dynamics occur in healthcare, just as destructive. Large organizations bully the small ones. And sometimes the large organization is the federal government…
Gary Mintchell says
Gosh, I fought that stuff in 1985-1987 when I was a VP of marketing/engineering for a company that built specialized assembly machines. GM stretched us out 75 days or longer if they could. We had an accounting guy who spent probably 25% of his time chasing invoices through the labyrinth. It’s not new–just getting worse.