Customer Payment Squeeze Chokes Suppliers

I read today’s WSJ article about how customers are using their suppliers to improve their own cash flow: Big Firms Are Quick to Collect, Slow to Pay  and thought, same old, same old. I addressed this phenomenon in an early blog post: Another Kind of Banker – Your Supplier?  This situation has been going on at many large firms for years, but currently seems to be at its worst. Big firms demand rapid payment from the firms who owe them money and at the same time string out payments to their smaller suppliers for months. It’s the underground banking system. And larger firms seem to get away with this behavior with impunity. Well maybe not quite. And at what cost?

In addition to the financial strain and potential breakdowns of suppliers put under financial duress, using suppliers as banks is a time-honored business practice with a short-term view. But this time the chutzpah of some of the customers has grown to the point where they’re stringing out the payments for long as 120 days. The ethics of this approach are poor.

Considering that in this current economy, smaller companies are unable to get the bank credit of the larger companies who are following this cash generation approach are able to obtain, the potential results are dangerous. These larger businesses won’t have their smaller suppliers to kick around any more. One reason is that the cash crunch has or will put many of them out of business. Or, in the inevitable “what goes around, comes around” cycle of business, the surviving suppliers will never work with these customers again. Memories of poor treatment, forced concessions, and being squeezed are long among suppliers. Even as smaller suppliers continue to work with these deadbeat customers now in order to get paid, supplier service levels and responsiveness will slow out of necessity. The corollary is that memories of good treatment are equally long. Those customers who treated suppliers fairly during bad times will create long-term loyalty and a willingness from suppliers to give concessions in order to continue the relationship.

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