Putting on the squeeze

It has become the norm for large companies to unilaterally change previously agreed payment terms. Towards the end of 2013 Marks and Spencer advised its suppliers of a shift in payment from 60 days to 75 days as it attempted to dress up its figures.

The issue is that the majority of supply chain contracts are one-sided arrangements. Large buyers can vary terms and for the most part the burden for this is borne by small independent suppliers who have little muscle and therefore can be bullied into acceptance.

Faced with supporting “extended” payment terms suppliers generally discover the chance to obtain funding from their banks is usually limited. They are left with having to seek other ways of improving cash-flow such as factoring but this adds costs and erodes profit margins.

There is a potential fall out for buyers looking to squeeze their suppliers.

Diminishing returns can result in suppliers concluding that the game isn’t worth the candle or those that decide to accept the new terms may well find it to be uneconomic in the long term and cease to trade.

Stretching payment terms may well provide short term benefits for buyers but the longer term implications could turn out to be very damaging in terms of continuity of supply and reputation in the market place.