Extended payment terms hurt the Supply Chain
Filed Under Blog
Over at Supply chain digest they’re running an interesting piece on supplier payment terms. It’s a nice article and a well trodden topic. As a supply chain professional it’s something your sure to come across at some stage.
When working with suppliers it’s often taken as a given (until things get “crunchy” and merely glanced over at contract discussion is that of invoice payment terms. Most organizations have a default position (net 30 days for example) and it’s usually accepted as a route to doing business with that particular customer.
SCDigests posts puts forward the hard fact (which we all knew) while its assumed as a given, in reality it’s not and practices and behavior varies.
Is stretching out invoice payments impacting your supply chain?
— supplychain mechanic (@supplychainmech) August 17, 2016
One things for sure poor payment practices abound.
As this recent article in the UK’s Telegraph put’s it the problem is not localized but affects suppliers across the globe in all industries.
The impact of paying invoices later than agreed terms is many fold not least of which the impact on cash flow. Long periods of debt can have a very negative impact . Suppliers still have their bills to pay (customers, suppliers, tax and staff for example).
It often depends on who sets the narrative, and all too often this is the finance department (one which may not be aware of the tactical or strategic impact of payment delays).
In many cases payment terms hinge on the relationships suppliers have with their customers. Larger suppliers can often get more favorable terms but obviously the smaller the organization the bigger the impact. In times of recession this is worsened by companies managing credit even tighter.
ABFA shows evidence that the shows the larger the business the better rates in can negotiate. ABFA’s report found that the smaller UK businesses could wait up to twice as long as it’s larger counterparts for payment
Of course there are methods which can be utilized like factoring to help mitigate the issue but this creates additional cost and admin burden. Factoring certainly isn’t suitable for everyone.
In some countries like in the UK government have attempted to influence policy through standards (https://www.gov.uk/guidance/prompt-payment-policy) in other areas (such as the Tesco example there are industry codes of conduct). Unsurprisingly these are not always adhered to and bad experiences are two a penny.
Better news for Supplier payment terms on the horizon?
With the bad press that poor payment practices can cause, it’s unsurprising that companies are trying to capitalize with its customers, from a marketing perspective, from demonstrating better behavior.
Within the UK’s supermarket sector Waitrose took advantage of Tesco’s bad had received by updating it’s policy (see http://www.fsb.org.uk/media-centre/latest-news/2016/07/11/waitrose-to-improve-payment-practises)
So are we turning the corner with this issue? Let’s wait and see, Industry bodies and governmental organizations should be applauded for attempting to make headway but it remains a tough nut to crack. This issue will be a perennial one and one things for sure, those smaller suppliers will feel it the worst.