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Achieving Balance In Managing Commitments

January 29, 2009

In all the talk about credit and financial viability, the voice of the customer has typically drowned the issues and concerns of suppliers. Certainly, my mailbox was full of messages from purchasing managers, expressing worries over supply chain security and how best to manage the risk of supplier failure.

It is interesting that this concern appears to have been so one-sided. After all, it is just as legitimate – arguably more so – for suppliers to worry about the security of their customers. Default on orders, failure to pay bills on time or at all – these are very real issues for anyone ‘investing’ in a customer; and of course ultimately may cause the supply chain disruption that those purchasing managers worry about.

The questions I received from purchasing managers frequently asked about ways to increase visibility into supplier security. They were concerned that traditional approaches to credit rating are simply not reliable in a period of severe economic turmoil. And of course, they are broadly right, though obviously some businesses and industries are relatively less affected (for example, those with enormous cash piles, or dealing largely with public sector customers).   

In truth, as a recent article in CFO magazine points out, it is frequently the behavior of customers that actually determines the fate of the supply base. Decisions to cancel orders, or to delay payments, or to negotiate massive price reductions are initiated through purchasing.

Companies need to get a better handle on their corporate customers’ ability to pay

The article highlights that around a quarter of public companies are at risk of defaulting on their debts. It also comments that “some companies want their suppliers to practically fill in as bankers, by extending payment terms and giving their working capital some wiggle room”.

Why does this imbalance exist? In large part, it is of course because suppliers need to be far more sensitive to their customers’ feelings than vice-versa. It is once more an example of the rather more vocal and belligerent behavior of procurement groups. In other words, they feel quite within their rights to demand evidence of credit-worthiness from their suppliers; yet as customers, they feel great insult if their suppliers make similar demands.

Many customers think little of extending their payment period or simply delaying payments – we all know that the old 30 day terms have steadily been going out the window, to an average today that is much closer to 60+ days. And if you are a small business, even that is optimisitic.  IACCM members running small enterprises regularly tell me of payments that take 4 or 5 months to reach them.

So should such delays be taken as a warning sign?  The problem for suppliers is that they do not want to alienate customers and risk losing their business; yet at the same time, they cannot risk non-payment or having to deal with a liquidator. They face a tough balancing act – unless we can somehow change the rules of the game.

Factoring debt and becoming far more cautious on credit-checking new customers are of course a couple of ways that companies can protect against insolvent customers. But perhaps one of the most striking things about the CFO article – and the suggestions of the experts it interviews – is how devoid they are of any real ideas for improvement. Turning up at local networking meetings of credit managers or establishing greater discipline in undertaking annual credit checks through completion of a survey hardly seem like optimum approaches in today’s electronically networked world.

In the end, true partnership depends on a readiness to share information, to become more transparent in providing the data that enables risks to be managed effectively. This takes us back to the core principle of ethical commitments – that they should be honest, open and subject to a robust on-going governance and reporting system. Surely in today’s technology era, it should not be beyond most companies to have transparent reporting information openly visible to their trading partners, on almost a real-time basis. And a  reluctance to do this shoud perhaps be taken as one of the clearest warning signals about their creditworthiness and their honesty. So who will take the lead?

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