I admit this is a rant so please proceed with caution. We, at TMG are busy – more than busy, which is great but for me it means that I have limited patience for anything that takes me away from doing what I need to do for my clients. Every week we rotate who is responsible for writing this blog and today was NOT my turn, BUT yesterday I picked up my WSJ at the end of my driveway (yes I still like to read a “paper”) and saw a front page headline “Firms Pinch Payments to Supplier” and I went nuts. I walked into the office and said. “I’ve got the blog this week”! So here goes . . . .
I spent the last two days working with a F500 retail client on the long term strategy for their Strategic Sourcing organization. We talked about what we, at TMG, have been advocating over the last two years – “old school” cost/price based Strategic Sourcing is DEAD and focusing on VALUE is a Next Practice. I walked out earlier this week and said “YES” because I felt like I had convinced a room full of Supply Chain executives that key suppliers must be treated like assets NOT adversaries. The day of beating down suppliers for every last nickel is over and yet numerous large, global consultancies (I refuse to name them but you are probably paying them $$$$$$$ – millions to give you old / lazy / bad advice) AND research firms continue to advocate a “cost focused” approach.
Here is where the rant comes in . . . the WSJ article talked about a global, Fortune 50 company moving to 75 day payment terms to their suppliers. “ . . . could use that cash to fund investments in new factories overseas or to help pay for stock buybacks.” This practice of squeezing even more out of an already lean supply base made the front page of the WSJ as a best practice??? By the way, there are several other large, global Fortune 50 Companies also named that have adopted that practice as well. REALLY!!! I’m not shocked, but I am mortified!!! By the way, this company has been named to the TOP 25 (Top 5 to be exact) Supply Chain Leader list of a major research firm for at least the last three years. I must ask myself, “what is the criteria to be considered a TOP 5 Supply Chain company when 75 day payment terms is being thrown around as a best practice?” Perhaps it is the fees they are paying this research firm . . . .
Now, many of you are thinking, OK, The Mpower Group is a supplier and therefore the 75 day payment terms is hitting too close to home . . . . . Here is our current thinking AND the first question we ask ALL our client, “have you asked your suppliers what they could do for you if you GAVE them $1,000,000?” Our discipline has moved so far toward the cost continuum that we have forgotten the VALUE that is generated from relationships. Come on everyone, how do you select a partner (any type of partner)? Is it based on cost? Or is it things like compatibility, shared values, trust, ability to expand “the size of the pie”, etc.? I hope the aforementioned company is smart enough to realize that suppliers will eventually need to make themselves whole and that can happen in a variety of ways – higher future prices, shifting their capacity to competitors, reducing quality, etc. This practice can also significantly increase their supplier risk profile. One safety / quality incident that adversely impacts consumers because a supplier is trying to make themselves whole from 75 day payment terms, can prove to be a legal / PR nightmare.
I think this company has been given some bad advice . . . perhaps they need to be working with The Mpower Group. The only thing is we won’t accept 75 day payment terms. On the other hand, we will accept $1,000,000 and will promise an ROI of at least 10X . . . . . .
Sorry for the rant . . . . . join in the conversation.
2 Comments
About 3 years ago, the state of Illinois – who is a ‘net exporter’ of businesses now (code for losing businesses to other states) was so far in debt they decided to announce payment terms of “Net 360 days” to boiler contractors at a state-wide pre-bid meeting.
There were approx. 13 contractors seated in the room as told to me by one of them. Upon hearing the news, about 2/3’s of them stood up and walked out. I never heard how their sourcing event went, but I can only imagine….
Although extending pay terms is nothing new and some industries – like my old steel industry alma mater – have even tried longer holds on monies promised Suppliers, I’ve always found that in the end you get what you pay for (or don’t). Private businesses should not try to conduct themselves like state or federal governments but obviously need to maintain positive cash flows. But taking it out of the hides of your supply base – the easy target of many CFO’s – is what I’d consider perhaps “penny-rich, pound-foolish”. Let’s not forget the law of physics here: what goes around comes around. Consequential days of reckonings always seem to come and Suppliers, like most of us who get poked in the eye enough, are not above doing then reciting that just line of recompense from the Chris Farley/Matthew Perry flick ‘Almost Heroes’: ” Vengence is sweet, Sir!”.
That is why I stopped my WSJ subscription!!! That is not really true, I am kidding, but I too can feel a rant coming on when I read similar reports. Even as a non-profit, or maybe more so because of it, IACCM suffers the pain when our members pay late. Sadly this happens with alarming regularity. Sometimes it isn’t a policy issue that prevents them from paying on time but rather their internal payment processes and systems, which have been automated or outsourced, are ridiculously complicated and cumbersome. When I need to seek help from my contact to get a payment made, they are often as frustrated as I am about how difficult it is in their company to get a supplier paid. For all the investment in automation and process re-engineering, I have to wonder how many steps backward have we gone in actually getting things done. What I’ve addressed doesn’t really talk to your point about the 75 day payment terms. Frankly, if we actually got a guarantee that we would be paid in 75 days, that might be preferred to 30 or 45 day terms that are completely ignored!
I’ll pass the ranting stick to someone else….