Kevin’s post the other day reminded me of a lesson from a wise mentor a long time ago in my supply chain days (while I started in accounting and ended as an operations exec supply chain is what I did for a living for most of the time in between … and it was in supply chain that I first learned lean). That is, payment terms, lead times and quality policies are not up to you – the end customer in the supply chain – the one that ultimately buys the product and uses it up – gets to call those shots.
It works like this: The Acme company sells to an end buyer – a government agency. The government wants two week lead times and will pay in 45 days. The Beta company is a supplier to Acme. There is nothing to negotiate but the price. Beta must provide the same lead times and payment terms. If Acme demands one week lead times, they are trying to shift a disproportionate she of the inventory investment (and risk) to Beta. If Beta demands four week lead times, they are attempting to shift the investment and risk to Acme.
Same is true with payment terms – Acme pays Beta in 45 days – period. Anything other than that is one company attempting to get the other to finance the supply chain.
Every supply chain has its own rules. The rules when you sell into a retail supply chain are apt to be 3 days lead times, 60 day payment terms and anything gets returned far any reason – or no reason at all. If you want to sell components into that supply chain you need to play by those rules …or go find another supply chain more to your liking.
If you demand other terms, you are asking someone somewhere along the chain to make you investment for you – to take on your risk – and the fundamental principle of risk and return always prevails. You will pay for it sooner or later … most often by someone willing to play by the rules. If you demand that your suppliers carry your risk, sooner or later your suppliers will penalize you for it … or quit on you and compel you to buy from less capable suppliers who are desperate enough to put up with your abuse.
Hardly anyone plays by these rules, of course. Walmart gets their money from customers almost immediately and uses it to finance their business for a month or more before its suppliers get paid. I run into machining, extruding and molding companies all the time who live three or four steps up the chain who tell me their lead time, payment and return ‘policies’, as if anyone three or four steps up the chain ever get to set such ‘policies’. They set RMA policies as if any of their customers really care a whit about their suppliers’ return rules.
But sooner or later the rules prevail, and quite often such suppliers are replaced and they never even know why. In fact, the supply chain found someone willing to do business on its own terms. More often, customers that abuse the rules of the supply chain never know how many extremely capable suppliers never knock on their door because they are unwilling to take the abuse. Walmart especially comes to mind. They believe American suppliers can’t compete with their offshore sources, wholly ignorant of the hundreds – probably thousands – of very, very good small and mid-sized American companies that never try to sell to Walmart because they wouldn’t put up with Walmart’s abuse if you put a gun to the CEO’s head.
You have to know the rules of the supply chain before you get into it, and you have to be ready to play by those rules. You can cheat for as long as someone has no choice but to put up with it, but it will bite you in the end.