New York Times article claims Big guys Squeezing suppliers to the Breaking Point David Gustin - April 9, 2015 1:46 AM | Categories: Payables Finance | Tags: Diageo, Stephanie Strom, SupplierPay, Trafigura I really appreciate Stephanie Strom’s recent New York Times article on slow pay by major corporates. I did feel it could have been much more insightful if the author had really pushed back on some of her interviews. For example, Why would a small business owner quit selling equipment to Anheuser-Busch InBev after it imposed a 120-day period for paying vendors, especially when they help ABInBev qualify for supplier diversity? Are you telling me he could not finance that receivable from ABInBev? I could give him plenty of options to do that. Large corporates know they must be good corporate citizens these days in the watchful eye of various Government initiatives to support small business. Some have even told me that is the reason they have signed up with a particular dynamic discounting program. We know the likes of Coca Cola, Intel, 3M, Siemens have also signed the White Houe SupplierPay pledge not to punish suppliers. I am sure ABInBev got a call as well. It would have been nice to hear some comments on this subject. I was a bit surprised at a Harvard professor stating “the additional financing costs that suppliers incur because they aren’t being paid promptly work their way back into higher prices for consumers,” without providing any empirical evidence. This is Harvard for Christ sake. Saying all suppliers ask for the same payment terms from their buyers (Diageo, the European spirits company, now asks for 90 days to pay its bills. Mondelez, Mars and Kellogg seek 120 days) is an oversimplication of complex business to business contracts. I know Mondelez and Mars source ingredients globally, so when they doing Best Cost country sourcing from Canada for mustard seed or Turkey for juice concentrate, there is no such thing as standard terms. There may be letters of credit, or perhaps even sourcing in renminbi. Its complicated. Irit Tamir, a senior adviser in the Oxfam America program aimed at ensuring that big global companies do not take advantage of small farmers and suppliers in the developing world, said she was concerned that such businesses, like Cargill, Bunge, the Noble Group and Archer Daniels Midland, were coming under pressure. Does Irit not know that Cargill runs an internal Hedge Fund to provide competitive advantage vis a vis its competitors. I wrote a bit about that here. These commodity companies also have 20, 40+ relationship banks fawning over them to do business. Just the other day Trafigura signed a $5.3 billion credit facility with 51 banks. So coming under pressure? Not buying that. Still, the author had a number of conversations and I encourage you to read the full article here Related Articles Voices (4) Kishore: 17.02.2016 at 5:12 am Robert and David, Does Interest rates and spread also determines the success of the SCF project…Does low cost of capital means more buy in for the SCF program in developed markets compared to developing markets? Regards Kishore Lead – Beroe Reply Robert Kramer: 22.04.2015 at 1:38 pm Hey David, You say that Supply Chain Finance isn’t used by most large suppliers and isn’t even offered to the small and medium sized suppliers (SMBs). You also argue that “these smaller, weaker suppliers are the ones creating the working capital of the buyer”. My team at PrimeRevenue has analyzed well over $1 Trillion in corporate spend and I can tell you that SMBs are a very small percentage of a large company’s spend. Therefore, any large buyer’s working capital initiative that depended primarily on SMBs would yield minimal results. However, minimal results is not what we see in practice. Several articles, including the WSJ article in April 2013, have cited multiple companies generating hundreds of millions of dollars each in operating cash flow by using SCF to support their payment term initiatives. Our SCF solution has been so important to our clients that some have mentioned us in their quarterly analyst calls, no mean feat for a provider of any solution. Larger and strategic suppliers are where the spend is, so buyers wouldn’t be achieving the results they are clearly achieving if strategic suppliers “more often than not” didn’t participate. You argue that small suppliers are creating the buyer’s working capital reductions, but basic math tells us this simply can not be true. There’s not enough spend there. Regarding SMBs. Their access to SCF is based primarily on the buyer’s rollout plan and to a lesser extent on the limitations of the chosen SCF solution. We offer our SCF solution to SMBs and we have thousands using our SCF platform through our automated supplier onboarding technology. You can find case studies on our website. So I wouldn’t make the blanket statement that SCF isn’t available to SMBs. It depends on the buyer’s objectives and the SCF solution provider’s capabilities. Is SCF all inclusive? No, few solutions are. Not all suppliers choose to use it and there are small pockets of spend where it isn’t applicable. Other buyer driven solutions like P-Cards have their place, but it’s for a small percentage of a large company’s spend. Those solutions existed long before SCF and you have to ask yourself, why does SCF even exist, never mind why is it taking off, if those solutions were meeting the needs of the supply chain. SCF exists because those solutions are very expensive and do not effectively meet the needs of suppliers, from larger suppliers to SMBs. Robert Kramer VP, Working Capital Solutions PrimeRevenue, Inc. Reply David Brown: 18.04.2015 at 11:18 am This is an interesting debate and it’s always nice to see this subject being reviewed. I have great admiration for the guys at Prime Revenue, after all they could be considered as part of the Godfathers of SCF and being well ahead of their time. However though, as much as SCF was ahead of its time, we also now all know that it has some serious limitations attached to it. It’s time that the industry was honest and recognized how SCF has FAILED to reach the masses. Instead of being an all inclusive solution, it is truly only applied to the strategic top tier suppliers, normally the top 100, due to reasons that many practitioners including McKinsey have identified. We all know and understand how SCF works, buyers pushing out terms, then offering SCF with attractive terms to its suppliers. The reality is that when these buyers attempt to push the payment terms out, more often than not the strategic suppliers push back and subsequently win this debate, leaving the weakest suppliers with no option, other than to accept the buyer’s terms. It can then be argued that these smaller, weaker suppliers are the ones creating the working capital of the buyer. So, in comes SCF to create this amazing bridge, or does it? In practice I have seen little evidence that the weakest suppliers get a look in at SCF and are left out in the cold due to the many issues involved in the process, value of invoice vs. on boarding costs being a prime reason. Instead it gets targeted at the strategic suppliers, the very ones that pushed back against the terms leaving the vulnerable suppliers in a worse position than they ever where before the introduction of the working capital improvement program. This comment is NOT taking aim at SCF and its original intentions as I am sure that the current outcome of SCF is not what the original intentions were. Market evidence is pointing to the fact that most SCF providers are now looking at options to address this issue / opportunity. This is an issue that MUST be addressed as in its current state, it has disastrous outcomes for every small to medium enterprise in the supply chain, after all the number one reason for supplier insolvency is still cash-flow. Until we find a solution to this I personally have no issue with the use of any instrument benefiting SMB’s like factoring, p-cards, loans etc that help the suppliers, after all it has to be better than going BUST because they didn’t qualify or get included in SCF in the first place. David Brown Founder @ Remitia PS: Say Hi to PJ from me….. Reply Robert Kramer: 10.04.2015 at 11:05 am Glad you commented on this article David. I think the entire Supply Chain Finance topic was dismissed too quickly. With SCF, suppliers can get paid at their current term or earlier. It eliminates the morality play around supplier cash flow. SCF also saves small suppliers money in terms of their capital costs. Look at the small supplier cited in the article which had their terms extended from 30 to 120 days. If they financed that extra 90 days with SCF it would have cost them about 0.25% of invoice value (and potentially saved them money if they took payment on day 10). Instead, they reduced their sales to ABInbev and chose to receive payment via credit card which costs them about 1.5% – 2.0% of invoice value. Without SCF, the supplier had to reduce sales AND pay 500%+ more in capital costs! Most big companies are extending supplier payment terms. The question for ABInbev should be why aren’t they making a relatively easy solution like SCF available to their suppliers (whether bank funded or self funded). As an aside, I have to chuckle at the multiple quotes around suppliers being bankers to buyers. It reminds me of the old “Winston Churchill” quote. Suppliers are already bankers to buyers with open account terms. They’re just haggling over the price. Robert Kramer VP, Working Capital Solutions PrimeRevenue, Inc. Reply Discuss this: Cancel reply Your email address will not be published. Required fields are marked *Comment Name * Email * Website Notify me of new posts by email.