Category Archives: Finance

Sound, Conventional Financial Management is NOT Good for Supply Chains

And it’s not good from a cost of capital perspective either!

While skimming through Purchasing Insight’s recent white-paper on “Supply Chain Finance: A Procurement Strategy” (after stumbling upon their recent “Supply Chain Leakage” post that got them a Sourcing Innovation Thumbs Up, I stumbled on the following paragraph:


By extending payment terms to suppliers (paying them as late as possible) DPO is maximized and by being efficient at collecting from customers (getting the money in as soon as possible), DSO is minimized. This is sound, conventional financial management. It’s all about keeping hold of cash for as long as possible, minimizing the need to borrow and providing an opportunity to earn interest on cash deposits. Poor management of DPO and DSO increases the need to borrow and, in an economic environment where credit is scarcely available to some, borrowing can be very expensive indeed.

It may be sound conventional financial management, but, in reality, maximizing DPO is just another name for screwing your supplier, and all that does is increase your costs while decreasing the overall value you are able to extract from the relationship.

All I can say is that I’m glad the next section went on to say that:


For the procurement community, 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.

Finally, someone else who realizes that screwing suppliers is a bad thing! (I’ve lost count on how many times I’ve had to rant on this subject over the last six years.) Because, as the white paper goes on to state:


There is another, more compelling reason why the traditional approach to working capital management doesn’t make sense from a procurement point of view. It costs a fortune! The fact is that the traditional, siloed, adversarial approach adopted by most buying organizations toward their suppliers has a huge supply chain cost especially in the current economic climate.

Hear, hear! In order to extract a 0.1% return by holding on to your cash an extra 30 days, you’re risking a rise in costs of 1% to 3% as your supplier passes on their high cost of factoring to you!

However, when trying to improve your working capital practices in such a way that they benefit you and the supplier to take cost out of the entire supply chain, don’t limit yourself to early payment discounts as the sole tool at your disposal. It can be a great tool, as cash strapped suppliers get cash early and you get a better return, but it’s not the only tool. Another option could be to buy the raw materials or components on behalf of your supplier. You might have more leverage with a supplier that you are doing business with on another category and be able to get a better price. A third option, especially in this economy, could be to barter services for better prices. Maybe they need help with their back-office functions. Maybe you have a great relationship with a GPO that could help them and your weight could get them better pricing, or, your technical experts, who recently oversaw the implementation of good back-office accounting and P2P software in your firm could oversee the implementation of the same software in their firm in exchange for free value-added services from them. Be creative. There are many ways to win-win.

We Need More Corporate Ethics – Bring on the No-Maximum Mega Fines!

As noted in a recent article on Fine and Punishment, it has been a bumper summer for corporate fines and settlements. With firms in Britain and America agreeing to pay over 10 Billion in the past three months alone, there’s too much corporate wrong-doing these days. But the current fines are not enough. For example, a mere 5K for violating 10+2 is a CEO’s lunch money these days in most Global 3000’s. The only act close to defining a fine that will take a real chunk out of the corporate coffers of the guilty that the doctor knows of is the National Defense Authorization Act (NDAA) which allows 15 Million Dollar fines for first offenses and 30 Million Dollar fines for second offenses.

The reality is that a fine is only a deterrent if getting caught would mean a loss. Let’s say the fine for stock-fixing is 1 Million but an investor group could make 10 Million on the fix. Guess what’s going to happen? The stock is going to get fixed if the investor group has anything to do about it because, worst case, they only make 9 Million. The fine HAS to outweigh the reward, or corporate wrongdoing is going to continue to permeate both the financial sector, and the supply chain practices in industries where unlicensed knock-offs (especially in pharmaceuticals or electronics) can save a middle-man millions of dollars and push profits through the roof. As the Economist article stakes, given a risk-free opportunity to mis-sell a product, or form a cartel executives will grab it. To them, it’s all about the almighty dollar — and earning more than their peers to earn Wall Street’s favour and have something to boast about at the next charity dinner. (For a great Wall Street Perspective, you have to check out Randall Lane‘s The Zeroes: My Misadventures in the Decade Wall Street Went Insane [now at a bargain price for the hardcover edition on Amazon.com — you can’t go wrong]. Audiobook also available).

Unless the potential fines are crippling, wrong-doing will persist*, and so will cheapening out. And this is the biggest problem. Right now, we need sustainability in supply management, but initial investment in sustainability always costs more, so not only are executives not going to green light sustainable efforts, but if the organization has to look green or socially responsible, they are going to fund the lowest-cost “accredited” third parties that they can find to be “socially responsible”, and, in particular, likely fund those that use shady practices and cut corners everywhere possible. Because when the dollar rules, as long as you can buy the image, why create the real thing?

But if we force ethics back into the corporate world, then maybe we can force sustainability in as well. And when the only choice for gains is again long-term strategy, which is precisely where the economics of sustainability really make sense, maybe we’ll see improvement in ethics and corporate responsibility across the board. Or maybe it’s a pipe-dream. Either way, heftier fines would be a great start!


After all, remember what Randall Lane discovered when he did a Trader Monthly survey in the zeroes:
  If you received an illegal insider tip, a sure thing, and had a 50% chance of getting busted, would you use it? Only 7% would. What about only a 10% chance of getting caught? The numbers spiked to 28%. And what if you had a 0% chance of getting discovered? Suddenly, the number surged to 58%! To the majority of our readers, cheating wasn’t an ethical issue, it was simply a matter of whether they’d get caught.

Finally, Someone Else Who Gets A Key Point of Working Capital Management!

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.

Who’s in Worse Shape? The USPS or Royal Mail?

According to this recent article on Accounting Madness in the Economist, Royal Mail has racked up a £10 Billion deficit in unfunded pension liabilities alone. Wow! The USPS, which is about $15 Billion in debt, only racked up 5 Billion in underfunded pension liabilities. And we thought they were doing well, as they saved over 300 Million pounds in the first phase of their Procurement Transformation and expect to save over 600 Million pounds in the second phase. Too bad they don’t understand that contingent liabilities are still liabilities and that, if ignored, will just come back to bite you in the thigh, repeatedly, like your friendly neighbourhood boghog.

Who came up with the National Accounts rules anyway? The pension liabilities of unfunded pension plans are contingent liabilities and are therefore not recorded as liabilities in the National Accounts or public sector finances. How can you count the assets, and say you have a £16.5 Billion Surplus, but not count the liabilities, especially when the reality is that you are in a deficit of £10 Billion? It’s just insane.

How much credibility would your Supply Management organization have if you only counted savings and not cost increases? Specifically, if you counted the $10 Million you saved on temporary labour on the balance sheet when reporting your successes to management but ignored the extra $20 Million you spent on oil because you didn’t lock prices in for the long term? Not much. Nor would it be wise to do so. Ignoring losses takes the focus away from where the organization, and cost management, should be focussed. It’s time for good GAAP to be accepted around the world, and, in particular, a GAAP standard that doesn’t allow such big gaps to go unnoticed for so long!

What Finance Still Wants from Procurement, At Least According to the Survey

According to a recent survey conducted by CFO Research Services, as summarized in a recent post on “How to Improve Procurement” over on Procurement Leaders, finance leaders want procurement to increase its contribution in the following areas:

  • Working Capital Management
    especially since Procurement spends so much working capital
  • Supplier Collaboration Improvement
    especially since Procurement has the majority of the interaction with suppliers
  • Business Performance Risk Management
    as Procurement is supposed to be on the 8-ball when it comes to risk
  • New Market / Business Line Expansion
    as Procurement is already in foreign markets buying and probably has the most low-down

So what should you do? Start with the advice offered by the author:

  1. Initiate discussions with Finance on how Procurement can make the greatest contribution in their eyes.
    Remember, Procurement’s biggest problem in many organizations is still its image. In many organizations it’s still seen as the island of misfit toys, the ax men, or the one-trick cost-reduction pony. It doesn’t matter how much Procurement saves, how much it reduces organizational risk, or how much value it brings, if Procurement’s image doesn’t change, then all of its contributions are for naught.
  2. Develop a plan to embed the right analytical and financial skill sets in Procurement.
    Face it, success today depends on the ability to analyze data, extract information, and generate the knowledge that the organization needs to make the right decisions. This requires the right skill sets.
  3. Determine the right technology roadmap to support the strategy.
    This will be a two-part strategy. In the first part, the organization will implement a closed-loop e-Sourcing and e-Procurement / P2P solution to reduce tactical processing requirements and free up more time for strategic activity. In the second part, the organization will use appropriate analytical solutions and apply it’s new analytical skills to trying to find more opportunities to increase organizational value.

And then, finally, don’t forget to create an appropriate transition plan — remember, success depends on the 3 T’s — talent (with the right skills), technology (with the right functions), and transition (to the right operational structure).