paying late is actually the right thing to do.

SI has said since day one that you should never pay a supplier late, and it still believes this, but the reality is that sometimes late is not late. So when is late not late? Simply put, when paying the supplier late hurts the supplier less than it hurts you.

The whole point of paying suppliers on time is to not only keep them financially sound, but to reduce the cost of your end-to-end supply chain. If your supplier depends on your business and needs that cash to buy raw materials, pay its workers, and fund its overhead costs, and it has to wait for that cash, then it has to borrow money to buy those raw materials, pay its workers, and fund its overhead costs. And if it’s cash strapped, chances are it’s not going to get a good rate. Furthermore, if it’s small, or doesn’t have an A credit rating, it’s not only going to get a bad rate, it’s at risk of getting a very bad rate. Some suppliers often have to borrow at 20% to 40% to stay in business while they wait for your payment, which sometimes doesn’t come until 120 days after the product has been provided to you. If such product takes 60 days to make and ship to you, that’s 180 days the supplier is waiting for payment and the cost has been effectively increased 10% to 20%. And who do you think is paying for that? You are!

However, sometimes we have the opposite situation – a buyer who is strapped for cash waiting to get the next product to its customers and a large supplier, who does business for a lot of large companies, that is in a relatively cash rich situation. In this situation, the buyer might be forced to borrow cash at a relatively high rate of interest, which could easily be 12% to 18%, while the supplier could go another 60 days without payment with no adverse effect. Paying the supplier on-time in this situation is ultimately as damaging to the supply chain as a whole as paying a cash-strapped supplier late. Anything that increases the cost ultimately increases the price to the end consumer. And anything that increases the price risks decreasing the customer base, and the overall revenue that keeps the supply chain going.

So, if you do have the opposite situation, despite the supplier’s grumbling, you should pay late. But ONLY if you have this situation, which, generally speaking, occurs less than 10% of the time. So how do you know if you have this situation?

Come back tomorrow to find out.