Regular readers will know that SI has been ranting about all the hype-talk about Working Capital Management for years, including this post where the doctor got sick of all this working capital management talk. The simple fact of the matter is that most companies don’t understand what working capital management really is and mistake screwing suppliers (whether or not it is intentional) for lowering supply chain costs. The reality is that lowering your cost today is not good working capital management if it only raises your cost of acquisition tomorrow.
That’s why it was great to see this recent post over on Purchasing Insight on Supply Chain Leakage – Stemming the Flow of Costs. As per the article, when you calculate the scale of costs that leak from the supply chain, it reveals astonishing waste and it’s time that businesses — suppliers and their customers — took a closer look at collaborative techniques to take out these pointless costs.
As the article says, payment terms can be a double-edged sword. While it’s good to contribute to the reduced cost of working capital by extending payment terms, this doesn’t always support healthy supplier relationships and it can put an inordinate strain on the finances of the supplier, which is in the interests of neither party. If your cost of capital is 1%, and your supplier’s cost of capital is 10% or 20%, you’re just increasing your costs by 10% to 20% by paying late to save a paltry 1% or 2% cost on a short-term loan. The numbers just don’t add up.
True savings propagate through the supply chain. They are not limited to your organization.