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Suppliers Squeezed on Payment Terms…Deja vu all over again?

Money Crunch

When I picked up my copy of the Wall Street Journal from my driveway the other morning (yes, I actually read a paper version of a paper…no age jokes, please), I thought maybe I had walked through a wormhole and gone back in time to 2009-2010.  Staring at me from page 1 was this headline: “P&G, Big Companies Pinch Suppliers on Payments”.  Shockingly, extended payment terms was again front page news!

In the height of the credit crisis and cash flow crunch that dominated the last few years, one of the first things many companies did was to extend payment terms with their suppliers to free up cash from working capital (I would link to all the articles and blogs I wrote about this, but that would take up too much space here!).  Apparently, according to WSJ reporter Serena NG, some big companies like Proctor and Gamble are just now catching on and catching up by extending their terms to 75 days from a current 45 (while some competitors maintain 100 day terms!).

As the article points out, companies like P&G do this because the cash freed up by taking longer to pay suppliers gives them increased ability to “fund increased capital expenditures as well as expansion in emerging markets while continuing to return the bulk of profits to shareholders via dividends and buybacks.”

The problem with such an approach comes when large organizations myopically focus on their own cash flow needs while ignoring those of their suppliers and the effect such terms extension can have on them.  Rather, in today’s uncertain economic times, it is more important than ever for buyers and suppliers to work more closely together to share the burden and embrace innovative ways to ensure their mutual health.

To their credit, P&G is apparently offering certain suppliers the opportunity to fund earlier payment through supply chain financing (SCF).  However, while  SCF is indeed a win-win that allows buyers to extend terms while suppliers still get paid early, it is typically narrowly focused on the top tier of suppliers, where there is sufficient spend for banks to reap a profit on such a low margin product.  The bulk of P&G’s supply chain, the mid-tier suppliers, will likely never have the opportunity.

To address the needs of this segment of their supply chains, innovative companies are embracing the technology enable collaborative cash flow practice of dynamic discounting as a win-win solution that provides early payment to suppliers in need, while also reaping great savings and earnings on cash for those buyers that offer it.  Some of the benefits achieved are:

  • Savings of $3+ million per $1 billion in applicable spend for Buyers
  • Payment in as little as 3 days for suppliers
  • 5%-15%+ return on cash deployed for early payment
  • Overall increase in days payable outstanding when offered in conjunction with terms extension program
  • Supplier instant voluntary access to cash on-demand (an ATM for receivables).

Used as a working capital & risk mitigant tool, dynamic discounting offers buyers like P&G a way to free up cash from working capital, increase savings, and reduce supply chain liquidity risk in a way that is truly a win-win scenario for all parties involved.

While there is no denying the reality that longer payment terms have become a way of life in the modern business environment, it is also clear that such terms can impact suppliers greatly when they find it tough to access the capital they need to sustain – much less grow – their operations.   Dynamic discounting, in conjunction with or separate from SCF, offers a great way to blunt that impact and provide true value to all parties.

And this type of win-win collaboration is what the Networked Economy is all about!

About the author
Drew Hofler
Drew Hofler
Manage Cash Solution Marketing Director

Drew manages the product marketing of Ariba’s Working Capital Management and Payment suite of solutions, including Ariba Discount Pro, Ariba Third Party Financing, Ariba Receivables Financing, and Ariba Payment Pro. A more-than-20-year backgroun... Read More >>>

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