High level executives, often at the CFO level, are trying to extend payment terms to increase cash. Longer payables equal more cash on-hand. It sounds like a great concept to some in the organization (mostly in the finance world). Wal-Mart, for example, has popularized the idea of not owning goods until they actually sell them. On the other side, the supplier produces and delivers the goods, but doesn’t get paid until the items are purchased by a consumer. But procurement thrives on pricing — beating down prices on piece parts. As the back office maximizes cash by extending terms while procurement wrings out every dollar it can, suppliers are being squeezed to the point that their viability is at risk. Adding to this, suppliers today are coming from even further places beyond the BRIC countries. Many suppliers in emerging markets can’t handle payment terms that have grown as high as 120 days, especially when they are getting pressured on price.
Bridging the Divide
There’s an interesting trend developing within manufacturing organizations these days as a result of the varying outlooks regarding how to manage suppliers. Here’s how it is playing out:
- Finance departments are extending payment terms when they can – sometimes forcing suppliers to shift from 30 days to 120 days.
- Procurement departments are getting the lowest possible part price, shaving the margins of suppliers.
- Supply chain departments are developing supplier risk task forces designed to assess supplier viability and risk. Their goal: identify suppliers that are at risk – often financially – and find ways to reduce it.