Hackett Data Shows Companies Taking Longer to Pay Suppliers, While Most Summaries on DPO Metric Don't Get it Exactly Right

Each year, the consultants and analysts at the Hackett Group put together a major report on working capital performance for some 1000 of the largest US public companies.

Changes in working capital - which translate directly into improvement or degradation of cash flow, one of the key measures of a company's financial performance - are derived from changes in three key metrics: Days Sales Outstanding, Days Inventory Outstanding and Days Payables Outstanding.

Supply Chain Digest Says... To be clear, both the example DPO numbers are independent of how long it actually takes to pay suppliers, as measured in the average time from invoice received to invoice paid. What do you say? Click here to send us your comments Click here to see reader feedback

In years past, SCDigest has used a spreadsheet of data generously provided by Hackett to analyze both inventory and payables performance. This year, however, Hackett changed the way they classified companies in a way that significantly reduced the number of firms with physical supply chains, so we did our own analysis on the inventory side (see Supply Chain Inventory Performance Part 2).

On the payables side, we are going to look at some of the summary data across companies and list results for a few select companies in the Hackett data set. It also gives us a chance to provide some insight on DPO.

Investopedia defines DPO as follows: "Days payable outstanding is a company's average payable period. Days payable outstanding tells how long it takes a company to pay its invoices from trade creditors, such as suppliers."

This isn't exactly right, as we will explain in a moment. Regardless, DPO is calculated as follows:

DPO = year end accounts payable / [cost of sales / 365 days]

In terms of working capital and cash flow, an increase in DPO is a positive - forgetting for the moment any potential business ethics issues involved in stretching out payments to suppliers.

So by way of an simple example, if a business has $ 2,500 in accounts payable, $12,500 in cost of goods sold:

DPO = (2,500 / [12,500/365] = 73 days

Investopedia further adds that "Most companies' DPO is about 30, meaning that it takes them about a month to pay their vendors."

Again, not exactly correct. Why? Because a key factor in the equation is obviously cost of goods sold (COGS). COGS is used to calculate a company's gross margin - and COGS and therefore gross margin vary across companies.

So, take the example used above. Another company with the same revenues and same level of payables could have a higher levels of COGS, say $20,000 instead of $12,500 (meaning its gross margin percentage is lower). Now:

DPO = (2,500 / [20,000/365] = 45.6 days

To be clear, both the example DPO numbers are independent of how long it actually takes to pay suppliers, as measured in the average time from invoice received to invoice paid. Both example companies could actually have the exact same or similar numbers when looking at payables performance in that way, even though the DPO numbers are very different.

All that said, DPO is a useful measure for tracking changes in payments to suppliers, and Hackett measures changes in DPO across the 1000 companies it analyzes each year, as shown in the graphic below. The chart is based on data excluding oil and gas industry companies, as the dramatic drop in oil prices and hence COGS in that sector distorted the overall data:

Source: Hackett Group

So, as can be seen, by this measure companies have increased the amount of time they take to pay suppliers over the last two years, with DPO climbing from 48.2 in 2014 to 53.4 last year, an increase of 10.7%., supporting reports that even here in relatively good economic times many companies are taking longer to pay supplier invoices.

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All that said, below are some DPO numbers from a few prominent companies in 2016, based on data from Hackett:

• Cooper Tire: 51
• PepsiCo: 87
• Coca-Cola: 66
• Dr. Pepper Snapple Group: 44
• Molson Coors: 179
• A.O. Smith Corp.: 128
• Monsanto: 65
• HP: 104
• Hewlett Packard Enterprise: 67
• Brocade Communications Systems: 65
• Owens Corning: 57
• Whirlpool Corp.: 97
• Owens-Illinois: 83
• Packaging Corp. of America: 29
• Diebold Nixdorf: 84
• Kraft Heinz: 98
• Mondelez International: 128
• Walmart: 43
• Sears: 23 (likely because vendors imposing tough payment terms)
• AutoZone: 316
• O'Reilly Automotive: 263
• Cardinal Health: 55
• AmerisourceBergen: 61
• Procter & Gamble: 116
• Kimberly-Clark: 88
• Estee Lauder: 150
• Honeywell: 89
• 3M: 48
• General Electric: 72
• Amazon: 114
• Overstock.com: 26
• Land's End: 78
• Navistar International: 62
• PACCAR: 26
• Stanley Black & Decker: 89
• Joy Global: 51
• Zimmer: 67
• Alcoa: 67
• Reliance Steel: 18
• General Motors: 78
• Ford: 65
• Tesla: 152 (has some cash flow issues)
• Harley-Davidson: 24
• ACCO Brands: 49
• Johnson & Johnson: 141
• Merck: 129
• Boise Cascade: 21
• Louisiana-Pacific: 19
• P.H. Glatfelter: 45
• Hasbro: 52
• Apple: 112
• QUALCOMM: 86
• Under Armour: 61
• Columbia Sportswear: 62
• Hanesbrands: 67
• Fastenal: 21

SCDigest is obviously limited by the data Hackett has assembled. For example, why Under Armour, but no Nike in the list? Who knows. But this provides some insight into how many leading companies are handling payables to suppliers - big differences among them in terms of DPO.

Any reaction to our discussion of the DPO metric, or the results for these select companies? Let us know your thoughts at the Feedback section below.

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