Posts Tagged ‘suppliers’

“Need Cash?” teaches you how to improve working capital use, but be careful

Tuesday, April 28th, 2009

I have mixed reactions to the article “Need Cash? Look Inside Your Company” by Kevin Kaiser and S. David Young in the May Harvard Business Review. There’s no doubt that better working capital management can help lots of companies get through this difficult environment. At the same time, offloading your problems to your suppliers is a recipe for long-term difficulties.

I’m speaking of the practices around accounts payable management. The authors identify a mistake companies frequently make: assuming that receivables timelines and payables timelines are symmetrical. If I get paid net 30, I should pay net 30. Instead, they assert, each company should assess its environment, power over suppliers (or vice versa), and from there determine how it should pay/be paid. It may be possible to get paid by customers net 15, and pay suppliers net 60. This has a huge beneficial impact on a company’s working capital.

However, paying suppliers terribly late has nonfinancial costs. While a supplier may accept lengthy payment terms, there may be resentment, that can cause difficulties when contracts are renewed or new business contemplated. Suppliers may prioritize the needs of other customers who pay more timely. Other terms, such as delivery, might be tightened, which has impacts.

Worse than all this, though, is trying to changing payment terms unilaterally, or even invisibly. This is the old “hiding the invoice in the desk” trick, the “I didn’t get your invoice, please resend” trick, or the “phantom dispute” trick. In this case, the supplier negotiates net 30 terms but ends up getting paid at the whim of the customer. These kinds of techniques might be needed when you are truly distressed, but be prepared to be treated like a distressed company if you use them.

My experience, in account management, sales and executive leadership, has been overwhelmingly as a collector. Knowing that my company treated invoices from its suppliers as serious commitments helped me hold customers accountable to pay timely.

The authors are correct that companies should negotiate payment terms based on their strength in the situation and try to create an environment where they pay late and collect early. However, companies must live up to those negotiations. Don’t ignore payment terms or mess vendors around when their invoices come in.

Your collectors will thank you for it.

Related post:
If your key suppliers are in trouble, so are you

Tags: , , , , ,
Posted in alliances | Comments

If your key suppliers are in trouble, so are you

Monday, March 23rd, 2009

When times get tough for businesses, they use the tools at their disposal to manage through till things get better. The tools that can make a difference quickly are blunt instruments that often have detrimental side effects. There has been a lot of creative thinking this time around about the wisdom of one of those tools, layoffs, and possible alternatives.

There is another set of tools that is easily used but which has not received as much scrutiny–shifting some of your issues to your suppliers. The favorite of these is s-t-r-e-t-c-h-i-n-g out payments. Perhaps, rather than paying your raw-materials vendor, or outsourcing provider, in 30 days, you let that stretch to 45, or 60, or more. Perhaps you wait till suppliers lose patience and escalate before you pay, and then, pay only the oldest invoice. You can also dispute invoice items and hope the supplier eventually credits that amount to you. Voila! Better cash flow.

In the current issue of the Wall Street Journal Business Insight supplement, Robert Handfield of North Carolina State University makes a well-reasoned case as to why companies should think twice about trying to solve their problems on the backs of their suppliers (”United They’ll Stand“). In particular, the costs of a significant disruption in the supply chain can overwhelm any savings in working capital due to slow-paying.

Handfield recommends an open dialogue between vendor and customer to ensure that risks to the supply chain (like the vendor’s ability to survive) are identified. He also urges customers to engage more closely with its best suppliers to ensure they have a relationship that will last beyond the current crisis. (In other words, if you want to take out your suffering on your suppliers, you may pay later by losing them.) Finally, he makes the point that times like these are ripe for innovation, including improving how companies and their suppliers work together.

Handfield writes, “The decisions of supply-chain managers in the current crisis may be among the most important they’ll ever make.” Rather than distance yourself from your suppliers, this is the time to bring them close. And that may mean, God forbid, staying current with your payments to them.

Tags: , , , ,
Posted in alliances | Comments

In praise (kind of) of bankruptcy

Monday, March 2nd, 2009

The stigma of bankruptcy has colored the debate about whether and how to bail out the US automakers. (A friend recently pointed out an irony–”if we have to choose which company to bail out, it probably should be the one that doesn’t want to be bailed out, Ford.”)

In today’s Wall Street Journal, a Harvard Law School professor, Mark Roe, takes up the question, in the op-ed “Would A GM Bankruptcy Crash Its Suppliers?” And he points out that there are several pieces of the bankruptcy code that are favorable to suppliers and might allow them to be better off than they are in the current situation:

Courts know that bankrupt companies need to keep getting supplies, inventory and parts for manufacturing to be viable. Hence, the bankruptcy code and the bankruptcy courts put payments for new supplies at the top of the queue, even ahead of most old lenders. Send in fresh supplies, and the courts have the bankrupt company pay for them, even while prebankruptcy creditors cool their heels.

When that is not enough, courts can do more. Critical vendors can have their prebankruptcy invoices paid if that’s what’s necessary to keep the supply conduits fluid. A bankruptcy judge has to approve these kinds of payments — they’re not automatic — but the approvals are regular and quick, sometimes made on the first day of bankruptcy.

My experience backs this up. I managed the customer base for a company who counted among its biggest customers Worldcom and two divisions of Adelphia, all of whom declared Chapter 11 in the early 2000’s. (We got “critical vendor” status at Adelphia.) While the process was painful, and required a lot of careful management on our part, we were paid during the bankruptcy, and even got back (eventually) most of the receivables that were outstanding at the time the companies declared. Moreover, they were still customers years later, by the time I left that company.

I would underline Roe’s point that a supplier to a Chapter 11 company at least has knowledge that they are at the front of the line to be paid for services provided under Chapter 11, that the company is bound to pay timely, and finally that there is recourse through the bankruptcy court for disputes.

It’s time to look at the Chapter 11 option clearly, instead of stigmatizing it as “broke,” “insolvent” or “destitute.” Because the current situation, of continually pouring money into the companies in exchange for half-measures at restructuring, isn’t doing the suppliers, the company, or the country any good.

Tags: , , ,
Posted in Uncategorized | Comments