Supplier payment extension, a practice that found favour among sales and manufacturing companies during the 2008/2009 recession, has never gone away. No longer is it about survival during a financial crisis though. Instead, extending payment terms has become a popular trend among large, financially healthy corporations, which essentially use their suppliers as cheap sources of finance.
A Polarising Practice
The practice of supplier payment extension is polarising among supply chain players. Some buyers see it as a valid practice to improve cash-flow.
Some suppliers are forced to increase their prices as a result of payment extension pressure, while others push back aggressively, even refusing to supply under terms unilaterally dictated by their business customers.
Some observers consider supplier payment extension to be an unethical practice which ultimately punishes end-customers and consumers. After all, these are the people who must swallow price increases as payment extension practices send shock waves up and down the supply chain.
From Survival Measure to Business Strategy
During the global recession, supplier payment extension became a common tactic for companies struggling to stay afloat. Eventually the recession went away, but supplier payment extension did not. Today, the roll-call of companies that routinely make their suppliers wait up to 120 days for invoice payment includes:
- Proctor & Gamble – 75 days
- Unilever – 90 days
- Diageo – 60 days
- Anheuser-Busch InBev – 120 days
- Kellog – 120 days
- Mondelez – 120 days
- Mars – 120 days
A handful of these companies are taking steps to (arguably) help suppliers by offering cheap supply chain financing through banks and lending institutions. These instruments allow suppliers to receive cash within a few days of invoicing, but of course for this they pay a fee.
Meanwhile, the customers effectively get to delay payment—usually without penalty or interest—for four months or in some cases even longer.
Adding Insult to Injury?
If supporting suppliers via reverse factoring or supply chain financing is the best scenario in the supplier payment extension game, the worst cases involve companies that unilaterally extend payment terms, and then default on the new terms, delaying for as many as ten days after invoices have become due for payment.
It’s completely understandable why this behaviour is distasteful to suppliers. After all, if they are not being paid in a timely manner, they are forced to increase their prices or pass the problem up the supply chain by paying their own suppliers late.
Pushback is inevitable and of late, stories abound of suppliers turning their backs on customers, even those representing up to 20% of total sales, rather than give in to unilateral extensions of payment terms.
Some suppliers are deeming contracts null and void when the customers break with the original payment terms, and so serve notice that no further orders will be fulfilled without written confirmation that original terms will be met.
Where Do You Stand on Supplier Payment Extension?
If you’re a supply chain leader, you might be representing one of those companies that extend supplier payments, you might be considering doing so, or perhaps you’re morally opposed to pressurising suppliers in this way.
On the other hand, you might well work for an organisation that’s been on the receiving end of customers’ decisions to extend payment terms. Whatever your position, it looks like supplier payment extension is a practice that’s here to stay for the time being.
Discuss Payment Extension Practices and More at SCLB
The Supply Chain Leaders Boardroom is a private-members’ forum that connects you (face-to-face) with other executive leaders, with whom you can share your points-of-view, get second opinions on business ideas and gather information to help you make better supply chain decisions.
No supply chain topic is taboo among Boardroom members; making it an ideal environment to sense-check your thoughts about sensitive issues like supplier payment extension.
To find out more about Supply Chain Leaders Boardroom membership, please contact us and register your interest. We look forward to having you aboard—and to hearing how you feel about supplier payment extension practices.