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Focus: Sourcing/Procurement
Feature Article from Our Sourcing and Procurement Subject Area - See All |
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From SCDigest's On-Target e-Magazine
- June 5, 2013 -
Supply Chain News: Procter & Gamble Announcement on Longer Payment Terms Brings New Round of Extensions in Consumer Goods Industry
Kraft Spinoff will Now Pay Suppliers…In 120 Days? Where will it End? Could be Real Issue when Interest Rates Eventually Rise
SDigest Editorial Staff
A few weeks ago, we reported on news that consumer packaged giant Procter & Gamble was extending its payment terms for vendors from 45 days to 75 days, in a program to be phased in over three years but starting immediately.
That as P&G was seen as being late to the extend terms party, as many others in the consumer goods industry had already moved on to payments terms in the 60 to 100 day range. (See Procter & Gamble Late to the Game of Stretching Out Payments to Suppliers, but Ready to Join Party Now.)
SCDigest Says: |
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The real crunch is going to hit when interest rates start to rise to something more like historic levels. |
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What Do You Say?
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The driver? Improved cash flow of course, as the money P&G or any company sits on longer rather than paying vendors can provide a big bump in that important metric, and often raise a company's stock price as a result. In Procter & Gamble's case, it was estimated the change could result in a $2 billion improvement in cash flow annually.
Now, the Financial Times is reporting that after the P&G move, other consumer goods companies are upping the extended terms ante again.
For example, Mondelez, the former snack foods side of Kraft before it was split off as a separate company in 2012, recently told suppliers it was extending payments terms out to 120 days, starting July 1 - that's a full one-third of a year.
In a late April letter to suppliers (see below), delivered under the interesting subject heading of "World-Class Payment Terms," the company wrote that "Through an extensive analysis we have determined that in order to remain competitive, reflect current industry standards, and drive world-class growth, we need to change our payment terms. Effective the week of 1 July, acceptance of orders placed by us shall be expressly conditioned on the term for payment being 120 days."
A Mondelez spokesperson told the Financial Times that "Extending our payment terms allows us to better align with industry and make sure we compete on fair grounds, while simultaneously improving transparency and predictability of payment processes."
Got that suppliers?
The letter adds that Mondelez hopes the changes "will make us a more attractive and reliable customer."
Of course it will.
"Once a big company like Procter & Gamble goes public with this, it almost gives permission for other [companies] to do it," said Nancy Hill, chief executive of the American Association of Advertising Agencies. "I fear this is just the beginning."
(Sourcing and Procurement Article Continues Below)
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CATEGORY SPONSOR: SOFTEON |
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Advertising agencies are being hit with the extension along with raw materials suppliers, packaging suppliers and everyone else.
Taking the payment terms to such extreme levels may be indicative of two things: (1) Large companies are simply testing just how far they can push such terms - what's next, 180 days?; and (2) Many of them have become so lean that may there is not much more to squeeze out of operations, so the path of least resistance for additional financial gains from the supply chain is to further squeeze suppliers.
Mondelez International Letter to Suppliers on Payment Term Extension
Source: Financial Times
As with Procter & Gamble and others, it appears Mondelez will offer some type of assistance to help suppliers weather the cash flow storm, citing in the letter new on-line tools for "supply chain financing" that will be coming soon.
P&G is working with banks that will offer to advance cash to suppliers after 15 days of the invoice - for a fee of course. The business of "factoring" receivable has been around for many decades, and while it gets a company its money faster, that comes at a price in terms of margins. The good news is that with interest rates so low currently, the hit is not too bad. For invoices from a large, financially sound company such as P&G, the current charge for the early payment by the bank may be as little as 1.3%.
The real crunch is going to hit when interest rates start to rise to something more like historic levels. With short-term money so cheap currently, vendors can either borrow money to manage working capital themselves, or use a factoring program such as described above. Such programs sponsored by the buyer can often delivered more cheaply than market factoring rates because of the high assurance that a company like P&G or Mondelez will eventually pay their bills, even if it takes 120 days.
But if interest rates do rise, and vendors are now facing 100 or 120 day terms and factoring costs are now 5% rather than 1.3%, suppliers could be in a real world of hurt.
What do you think of large companies extending payment terms to as much as 100 days and now beyond? What is the impact on suppliers? Let us know your thoughts at the Feedback button (email) or section (web form) below.
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Recent Feedback |
Although on the business side, its understandable the push to improve an organizations financials, the stretch may prove to be an enormous struggle for suppliers margins and own financials.
As food for thought, although it's normally hard for consumers to organize themselves, I wonder what would happen if consumers would start claiming the same type of payment terms in all purchases, especially the ones enrolled in loyalty cards? One would say that this already happens to some extent.
Paulo
Supply Chain Operations
HBL
Jun, 06 2013
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Unfortunately - I also I do predict this will get REALLY bad in the US before it gets any better. For suppliers there is good news.
1) Things were so bad in Europe they passed a law that is just went into full effect in March 2013 that mandates payment terms of 60 days or less. Google/Bing "EU Payment Terms Directive" There is great CFO article on this.
2) I see companies begin to separate out how they treat their most strategic suppliers. We have seen more than one Vested Outsourcing relationships that the supplier was pre-paid an entire year. At a minimum - cost of capital associated with payment terms is factored into the pricing model when creating a Vested agreement....so this way buyers simply do not just push risk to the suppliers blindly. There is a cost - and transparency of Vested shows this. As more companies adopt Vested - the true cost of poor payment terms becomes exposed.
My advice - the company (buyer or supplier) that has the most favorable cost of capital should take the payment terms risk. Why? If supplier has a more risk (high cost of capital) than the buyer - they just pass it through in terms of the price. It's always cheaper for whoever has the lowest cost of risk to take the risk.
Kate Vitasek
Faculty
Univ of TN Center for Exec Education
Jun, 10 2013
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What's next. Should employees be told to wait 120 days to get paid?
Will the company offer "Paycheck Advance" financing like the "Supply Chain Financing". This might put all of those check cashing places out of business - or be a windfall for them.
This reminds me of the old Tennessee Ernie Ford song "Sixteen Tons", where he owes his soul to the Company Store.
Don't they realize that extended term costs will simply get baked into supplier prices at some point?
Ain't no free lunch.
Steve Murray
Chief of Research
Supply Chain Visions.
Jun, 10 2013
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Sure, lets just not pay anyone for a year and let China back the factoring monies.
Great Idea, what's next? Employees?
Sure folks, we would like to pay you every six months but you can borrow money from us at a low % rate, nice...
jim marzec
Traffic mgr
Marz Assoc
Jul, 23 2013
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All blue-chip companies pay employee salaries on the last day of the month, correct? How will vendors pay employee salaries on time similarly if their own collections are drawn out 120 days from billing - remember that the cycle of input costs for the finished good/ service is way ahead of billing date. This is very onerous on suppliers, who are mostly way smaller in size and financial strength and way way smaller in their negotiation muscle. A hobsons choice may I say.
mahender kuamr
CFO
anonymous
May, 12 2021
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