There was a report about a Fortune 500 company’s plan to change the payment arrangements with their suppliers. We thought this plan was counter-productive. While we have not heard any follow up news, perhaps you can provide commentary in our blog whether or not you see the likelihood this plan will have a positive outcome for ANY side.
The report noted the announcement of a new policy in order to raise money for investment in operations. The Wall Street Journal reported these savings could be invested in facilities or stock buybacks. The policy was to extend payments to suppliers, but the company would work with suppliers to gradually implement the plan. Evidently the major company unilaterally decided to challenge terms of business that had been in process. This did not apparently refer just to new supplier relationships, but rather to all suppliers.
Proficient Sourcing is a network of high performing small custom manufacturers (most are under $20M/year in sales), so maybe we’re under the threshold of suppliers usually involved with supplying major corporations, but we doubt any supplier would look forward to extended terms of payment without some offsetting compensation. But so far we have no evidence any was offered.
Every company seeks to improve cash flow, and that’s evidently what this major corporation has in mind. However, we wonder if they believe their suppliers are immune to the same cash flow interests? Is it possible the big company believes their cash interests are somehow more “valuable” than those of their suppliers? Or are we missing something here? If we are, please let us know and contribute to our blog.
We’re confident the suppliers will experience a negative cash flow cost due to this policy. And they are evidently expected to absorb this cost because that the big company will sell more products and ultimately need more supplies. This suggests a positive relationship between cash flow and sales. Just how does that work?
So again, if you can enlighten us, please do so!
We would suggest the cost of doing business with this big company has just increased, even with the current very low rates of interest.
And so the choices are a) take this punishment, or b) reduce the value of this big company’s business via a number of possible actions.
Obviously a price increase is one. Another is a less urgent response to some customer problem because the big company’s priority position has been reduced.
A few days after this news appeared someone wrote a letter to the editor pointing out that the big company may have missed a real opportunity to generate a win-win solution. And that would be to work for price reductions in exchange for early payments. Since the big company has an enormous infrastructure of clever financial people, surely they could come up with a plan to generate cash savings via lower prices for faster payments. In other words, isn’t it possible to construct a plan whereby reduced cost supplies are paid a little faster, and the buyer’s overall financial position is improved? We believe the suppliers we know would be very interested in such an arrangement. Is it possible this option was never on the table?
The original article sounds like the arrogance of bigness, and the assumption that cash is somehow different for them than small guys. We do not understand this at all. What’s even worse, maybe we do understand it. What is your opinion?