Supply chain · 12 August 2015

Clamping down on late payments and supply chain bullies

 

Large businesses can often take advantage of smaller firms through late payments and supply chain bullying
Large businesses can often take advantage of smaller firms through late payments and supply chain bullying

Many small suppliers suffer through late payments. Large businesses can take advantage of their size, delaying payments to maximise cash flow, essentially benefiting from free lines of credit. It’s a business practice that’s damaging to suppliers who, stretched thin, can struggle to meet their own payment deadlines.

The government recognises this and has delivered a message. Paying late is not okay. In March, the then business minister Matthew Hancock announced that come April 2016, the UK government will require large businesses to report on their payment practices.

It will include measures of payment terms, average time taken to pay, proportion of invoices paid beyond agreed terms and within specified time periods and late payment interest owing/paid.

This isn’t the first attempt to instil a culture of prompt and ethical payment. The Prompt Payment Code already encourages businesses to voluntarily submit to its practices, including 30-day payment terms (with an absolute maximum of 60 days). A compliance board monitors behaviours and suppliers can challenge businesses signed up to the code. Any found guilty of violations are removed from the group.

Supply chain “bullying” has caught media attention of late. As well as late payments, undesirable supply chain behaviour includes “pay-to-stay” where suppliers have to pay a fee or “investment” to guarantee a continuing business relationship.

Losing game

It’s all a losing game. Exploiting the supply chain will cause it to collapse. The relationships within it are mutually dependent. Supplier exploitation for short-term advantage is unsustainable and doesn’t nurture growth.

Capital costs for small suppliers can be significant, particularly in emerging regions. If late payments mean they can’t pay their bills they can’t grow. That’s to the detriment of buyers – it impacts the quality of goods, reliability, and deliverability.

The good news is that many prominent companies already understand the importance of constructive and collaborative supplier relationships. For their actions to match their intent they need the systems in place to ensure they can make prompt and fair payment.

Technology

Ineffective systems can result in late or unreliable payment. Communication technology is the key to solving this. To automate the complex invoice/payment process businesses need systems and processes designed with supply chain interactions in mind. A technology platform seeking to automate accounts payable and the procure-to-pay process can ensure accurate, prompt, and fair payment, as long as it’s built for collaboration and transaction-automation between trading partners and financial institutions.

This opens up possibilities for initiatives with mutual benefit, such as early payment programmes. Buyers agree to pay suppliers early, sometimes in as little as seven days, in return for discounts. In this way they invest in their suppliers, either by partnering with financial institutions or by self-funding and can offer better rates to cover capital costs than banks. Then, buyers can not only ensure the reliability of their supply chain but can also offer performance incentives based on metrics they value. Levi Strauss, for instance, partnered with the IFC to offer low-cost financing to its suppliers who conformed to their terms of engagement sustainability score. The better the score, the better the rates – it’s a win-win situation.

Automating payment with the right technology can create new, lucrative, collaborative possibilities across the supply chain. These latest measures highlight the need for buyers and suppliers to be able to connect with one another on more meaningful levels, in flexible and easy ways. The culture of payment is finally changing.

Image: Shutterstock

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ABOUT THE EXPERT

Kurt Cavano is the vice chairman and chief strategy officer of GT Nexus, a cloud based supply chain platform provider. It helps companies to manage their logistics and trade processes. Kurt is responsible for maintaining the company’s track record of innovation and market success, and for guiding key customer, industry and partner relationships.

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