Payment Terms – Fair or Large Company Arrogance?

Recently a major US corporation announced a new policy in order to “raise money for investment” in their operations by extending their payment terms to net 90 days. This was heralded by some news outlets as a wise maneuver, and would permit the corporation to invest in new facilities, buyback stock, or some other helpful things.

We wonder helpful to who?

How about the effect on their suppliers? Not mentioned! This giant company arbitrarily changed the terms of their purchases from net 60 (bad enough) to net 90 days. And this is a good deal? Not in our book by any means. Sounds to us like big company self-delusion. What do you think? Boy, would we be interested in blog comments, especially if you have experience with similar events.

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 sale without some offsetting compensation.

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? Where does such a belief come from? At worst, perhaps 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.

We are confident that cash flow is a greater concern to the small supplier than this enormous corporation. For sure the suppliers will experience the cash flow negative of this policy, which they are evidently expected to absorb with hopes that the big company will sell more products and ultimately needs more supplies. So this policy has something to do with more big company 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. 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 less urgent response to some customer problem because the big company’s priority becomes less.

A few days after this article 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 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. Many companies we deal with would leap at such an opportunity.

Another thought we advocate is for the buyer company help with material purchases. The large company may be in a position to get a better price on needed materials and by supplying it they avoid the inevitable markup involved by the outsourcing manufacturer. Yet, we are unaware of any buyer offering this assistance.

But 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.

One Comments

  • Dave Velzy

    September 27, 2020

    This only one example of applied OPM. Other Peoples Money.
    Worse is when the supplier says net 90 and pays net 120 or even only when you cut them off.
    Other examples of applied OPM are:
    False Just in Time programs which demand performance without doing the homework such as:
    – Shorter lead times, including immediate shipment of previously make to order items from stock.
    – Vendor stocking programs in the customers warehouse with payment on consumption at net 90..
    In several cases, the customer was in trouble. The suppliers question must be how much trouble?

    In each case I experienced, the supplier was reluctantly forced to concede… For a while.
    When the customer is a market dominant behemoth, or the item is a commodity, the supplier innovates or dies. If the supplier has any unique advantage and the supplier is bold, a delivery problem tied to payments has carved out exceptions to changes in ordering and payment practices.

    Reply

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