Many years ago I wrote about how many companies were trying to get a one-time boost in working capital by extending their purchasing terms from typical net-30 to net-90 and even net-120. In some cases they were even partnering with banks to offer the supplier a short-term loan to cover the longer payment terms. Really.
At the time I was running a medical device component company that was a sole source for many parts, so I had the leverage to reply back with “no.” I also had a letter that read along the lines of “I’m sorry to hear of your apparent financial distress and desire to ask our much smaller company for a loan, but we’re not a bank.” By the way, Quality Digest did a very funny video discussion of this craziness, calling out some of the well-known companies involved, which you can still watch here:
Here We Go Again with the Long Payment Terms
I’m not sure if it’s related to COVID, but over the past few months this has apparently become a thing again. I’ve heard from both our internal finance group as well as friends of mine at other companies that they are receiving many letters from customers saying that terms will be extended. In some cases the customers are also pushing suppliers into accepting third party purchasing cards (someone’s earning some points in exchange for the fees…!), or requiring that the supplier cover the cost of some internal initiatives or even take mandatory price cuts.
In all cases the letters usually state that the change is “to align with industry-standard terms” and “create a better supplier-customer partnership.” In most cases suppliers aren’t as fortunate as I was, and have to simply buck up and accept being bullied.
I can understand needing a few days for a probably unnecessarily complex A/P process to pay a bill. But anything beyond that few days is really just taking a loan out from the supplier. The customer may get a one-time boost in working capital from this effective loan, but the usually smaller supplier may have real cash flow issues and may need to forego investment into improved knowledge, design, and processes. Who really loses in the end.
Creating a Valuable Supplier-Customer Relationship
Tasking your supplier for a loan, let alone mandatory price cuts, is not “creating a better partnership.” It’s a myopic bully tactic to achieve a short-term financial result that results in resentment and decreased long-term improvement and quality. At my previous company, guess which customers received the most focus and attention, with a value that extended beyond the financial bottom line. The ones that understood and accepted the value (and price) of the component we were delivering, and paid fast. We went the extra mile for them. In fact, I could eventually predict which potential customers would turn into high value accounts simply by reviewing their first purchase order. If terms were unnecessarily long, or there were bureaucratic pricing reviews, then we assumed it was not a real “partnership” and we’d price the components accordingly.
At Gemba Academy we’ve had a policy since day one to pay our bills immediately. A bill comes in and we write a check or send the funds, which means we don’t need complex A/P processes to receive and enter bills and then pay them on some schedule. Waste! This has engendered us considerable good will with our suppliers, which has paid many rewards in terms of a higher level of service, improvements, and simply the trust created by a friendly relationship.
Negotiating pricing that appropriately compensates value and then paying bills quickly is just one aspect of a real supplier-customer partnership. You also want to be open, honest, and transparent with each other to create trust. Some level of NDA is probably necessary as part of basic good business, but it should not stifle communication and should be mutually protective. Contracts should not require an army of attorneys to decipher. Communication pathways should be known and standardized, but not constricted to the point that collaboration dies. Mutually agree on improvements, the framework for experimenting with improvements, and how the increased value will be shared. Focus on the potential long term value of the relationship, not the month-to-month transactional cost.
Think about the value you might be losing in a potential real supplier-customer relationship when you ask for unnecessarily long terms (a loan…), onerous contractual terms that assume the negative, or arbitrary pricing changes. Instead, forge real partnerships that will create value in the long term.