Stretching out Payments to Suppliers

In the world of business today, Cash, more than anytime else in the history, is the King. The state of flux of demand, the uncertainty of economy & it's performance, increased stress on asset utilization & risks associated with global trade have resulted in an increased stress on the Supply Chain. It looks logical that the largest cost contributor to the organizational costs will have to lead the initiative to preserve 'Cash'. The improved Cash flow i.e. Working Capital Cycle naturally improves the position of your company where now you need to borrow less money, return some cash to shareholders etc.

The Cash Flow Cycle of a business is pretty straight forward - you have accounts receivables (money that is to come into the business), accounts payable (money that you owe) & Inventory (money locked in the system). It is fairly obvious that the Cash is easy to be released into the business if the company works on reducing the days receivables outstanding and / or prolongs the days payable outstanding and/or reduces its inventory on hand.

As a sound business executive, you know which one of these is the simplest one to work upon. It is to Prolong the Payable. Increase the credit period with your supplier. It now is a new industry norm where 45 days payment period is out, 90-100 days is in. Suppliers have to wait these many days to get payments from their customers. The GAME OF STRETCHING OUT PAYMENTS TO SUPPLIERS is the route adopted by one & everyone right from the industry leaders like P&G to your own customers. This delayed payments will have some natural & some unintended impact on the Supply Chain.

Suppliers are under pressure to oblige the Customers so they absorb the additional cost of doing business. In economies like India where the cost of funding is in excess of 1% per month, that would mean 3-4% additional cost to be absorbed the supplier. It only means that the Supply Chain Initiatives of Cost (NOT PRICE) optimization will have to focus on the Suppliers. The Suppliers will have to take initiatives to improve on their Cost performance which may include their process improvements, quality, true cost discovery, inventory reduction & delivery performance reliability

In my opinion it can be an initiative of the manufacturing company as in the Supply Chain of their own end Customers the weakest link is normally not the manufacturer but is the Supplier base of the manufacturer

Comments

  1. Pravin Maheshkar CICC HZLMay 3, 2013 at 11:46 AM

    nice illustartion of subject matter.
    a complete innovative approach

    ReplyDelete

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