Dell and Others: The Business Dilemma of Pushing Out Payment Terms (Part 2)

In the first installment of this series, I began by suggesting that I don't buy in to the fact that there is a moral dilemma to push out supplier payment terms. But I quickly got sidetracked and began to explore the potential and challenge of early payment discount programs offering an alternative approach and thereby representing a potential win/win strategy for both buying organizations and suppliers that has yet to achieve critical mass inside any company that I'm aware of (except those that have moved to P-card driven approaches for the majority of their spend). However, I think it's worth exploring the absurdity of even positing the option of extending payment terms as a moral hazard.

Far too many things I've read about payment term extensions in the past paint the issue as fraught with negativity, suggesting that organizations opting to pursue such A/P approaches are somehow less moral than others. But I don't see it this way at all. I believe that the decision to extend payment terms is calculated business one that sometimes makes complete rational sense (e.g., take the example of an organization that is willing to jeopardize the potential to get the best possible pricing from a supplier for the opportunity to improve working capital to prop up its cash position and credit rating). But all too often, such a decision in a vacuum represents a bone-headed move suggested by treasury or outside consultants, given how suppliers nearly always find ways to minimize the impact (e.g., price increases or pre-dating invoices).

So for a short time, extending payment terms may improve working capital. But it almost always inevitably leads -- when payment terms exceed a certain norm or standard in a given industry, geography or market -- to greater variability and an inability to accurately forecast future payment liabilities accurately once suppliers find their own way of striking back (not to mention how suppliers, as they did in the case of GM during its dark supplier management years, can get even more aggressive and rebellious by focusing their innovation energies on other customers or even firing customers who go too far in payment strategies). And in the worst of cases, companies that extend payment terms may find themselves facing millions of dollars in additional cost when they must shut a production line or facility -- or fail to fill an order and lose customers -- because their behavior caused a supplier to go bankrupt.

Given the business impact and potential risk of payment term extensions, it's pretty clear there's no place to introduce the moral question at all. Companies that increase the time in which they pay their suppliers should focus their analysis on the business dilemma of the issue rather than waste a second losing sleep over the morality.

Jason Busch

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