Robert Handfield’s recent article in the Wall Street Journal, “United They’ll Stand,” promotes the idea of working with financially-stressed key suppliers to avoid pushing them over the brink into insolvency. The author is not advocating bailing them out, as suggested by Debbie Wilson’s in her post, Vendor Vulnerability – Handfield’s Flawed Recommendation. But rather, Handfield advocates several measures to help them get through these difficult times — ways that are also favorable to the customer firm.
The Wall Street Journal article points out that should critical suppliers fail, the ripple effect can end up costing the buying company far more than it anticipates, potentially millions of dollars in service failures and bankruptcies that could adversely impact the customer company. To avoid these catastrophes, Handfield suggests, for example, giving suppliers shorter payment terms. In stretching out payments to help their own cash flow, customer firms appear to suppliers that they are using them as a bank. In return for quicker payment, the buying firm should ask for better pricing. Customers could give reputable suppliers longer-term, fixed contracts with more favorable pricing linked to agreed-upon market indices, suggests Handfield. This could give the supplier the opportunity to stabilize and get additional lines of credit. Suppliers may be willing to give on pricing in exchange for long-term stability. Handfield makes a number of other suggestions, such as the buying firm not only having its own contingency plans in place and identifying alternate sources, but working with key suppliers to do the same (and of course, choosing the suppliers that you work with in this way very carefully).
Handfield is not suggesting that customers bankroll failing suppliers nor is he suggesting giveaways to suppliers. He is advocating that customers work as a team with key suppliers on creative ways to make it through tough economic times with both sides giving up to get something in return. Critical supplier failures are the outcome to be avoided. This requires communication, give and take, and creativity. Working with key suppliers in this way is not done just out of the goodness of your heart. The commitment and loyalty engendered by working with suppliers during tough times will pay off financially.
I have personally seen and been the recipient of the philosophy of stretched out payment terms to support the customer’s financials. Those suppliers that can withstand this practice in the short-term will be gone (if not gone, as in bankrupt) as soon as they are able to find customers with reasonable payment terms and performance. I have also worked hard to “go the extra mile” for a customer who paid quickly and to win more contracts from them. Companies that have reasonable payment terms engender supplier loyalty. T.J. Maxx, for example, has had a practice of paying suppliers quickly as a way to get the best fashion brands to sell them their excess inventory.
In a blog post, Ethical Payment Ethics: The Cost of Squeezing Suppliers, Rajesh Chhabara describes the situation further. He quotes Tim Cummins, president and chief executive of the US-headquartered International Association for Contract and Commercial Management, a global body with 5,000 members from 1,600 companies: “Our members are under increasing pressure from their [senior] management to renegotiate and extend payment cycle times in view of the ongoing financial crisis.” But he says that smart managers should tell boards that doing so is a threat to the reputation of the company and it may also threaten the security of supply chains. “It is not smart to put your suppliers out of business.”
Using suppliers as bankers can get firms out of financial jams in the short term. But it is neither ethical nor sustainable as a long-term practice. Especially when there are many alternative win-win approaches.
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