A Sourcing Innovation Prediction for 2013, Part V

The blame rests solely with the company and all companies who believe that payment terms of 200 days are reasonable! Governments should not only go to war over this atrocity, but should fine and criminally charge anyone who purposely delays payment to suppliers just to make the quarter / year end numbers look rosier! It’s one thing if the company doesn’t have money in the bank and can’t borrow at better terms than the supplier, and the supplier knows this up front but agrees to late payment in exchange for a greater margin knowing that the demand is there and the company will pay as soon as the customer does. But this isn’t the case.

Right now, most companies have money in the bank. Lots of it. Last year US-based Mega Corporations were hoarding $1.73 Trillion in cash! That’s roughly 12% of US GDP! And even if they didn’t have cash in the bank, there was still plenty of cash to borrow from the US banks that were sitting on $1.50 Trillion of excess cash reserves! (Source: The Guardian) In other words, the mega-corporations and big banks alone are sitting on a cash stock-pile that is 25% of annual US GDP! And while most of them may be doing their best to shelter it outside of the U.S. (Source: WSJ), and in Europe and Asia in particular, these companies still have easy access to that cash and, more importantly, typically have more cash in either the supplier’s home country or a country in close proximity to the supplier (since US companies are still outsourcing just about everything, despite the fact that it often makes sense to home-source and near-source due to rising transportation costs and labour rates).

They’re just choosing to …

Be a mean one, just like me.
They really are a heel.
They’re as cuddly as a cactus and as charming as an eel,
  just like me!
They’re all bad bananas with a greasy black peel!

They’re all monsters, worse than me.
Their hearts are empty holes.
Their brains are full of spiders, they have garlic in their souls,
  just like me!
(Even) I shouldn’t touch them with a thirty-nine-and-a-half foot pole!

They fill my heart with envy,
The way they run you ’round,
And promise you the moon while they run your business to the ground,
Given a choice between the two of us, you’d rather have me around!

They’re a …

The Grinch

We get the picture Mr. Grinch. They’re terrible people selling our collective futures for a slightly bigger profit today. And the worst thing is that they are too short-sighted to realize that, in the scenario described, a supplier bankruptcy really is their fault. If you told an average CEO that the company’s supplier went out of business, costing hundreds (or thousands) of people their livelihood, because the company too long to pay, what would he say? “It’s not our fault. We only represented 5% of their revenue. If 5% of our customers pay late, it doesn’t hurt us. So if they were run well, 5% of their revenue being late shouldn’t hurt them.” And the CEO would be right if only 5% of payments were late. But the reality is that, for many suppliers these days, is that they have to deal with 50% of their payments being late — real late, because once one mega-company shows that it’s okay to extend payment terms from one unreasonable number to an even-more unreasonable number, every other mega-company follows suit because they have a precedent and they have to do what they can to make their numbers look better, at any cost!

But since none of these CEOs or CFOs take the time to put 2 and 2, or 5 and 5, together, they don’t realize that at some point, there’s going to be too many 5’s, the supplier isn’t going to have the cash, and the local banks aren’t going to step up and lend the supplier any money. Banks don’t stay in business by handing out money to every Li, Wang, and Fung that walks through the door. They do it by managing risk. In this scenario, at some point the bank has to say to a begging supplier “if these companies haven’t paid you by now, they’re probably not going to pay – and even at 20% interest, we can’t lend you money that we feel we have a 0% chance of seeing again“.

So unless you want your company to be one of the ones where the CEO and CFO have this conversation later this year (before they lay you off as part of their bankruptcy restructuring plan), keep on top of Accounts Payable and make sure you do everything you can to insure that your suppliers, especially your cash poor ones, get paid promptly. Otherwise, you’ll be a grinch by association. And we’re better than that!