An Open Letter to the WSJ: Do Big Companies Really “Pinch Suppliers on Payments”?

When we see business and news media coverage of the somewhat esoteric procurement, finance and supply chain topics that form the core of our focus on Spend Matters, we usually celebrate. The classic logic is that the more attention the popular press can bring to supply management, the better for everyone on the supply side. Yet sadly, this is not always the case anymore.

Shades of grey are to blame. Procurement and finance topics are more complicated than ever, especially where new processes and supplier engagement approaches can lessen the often zero-sum buyer/vendor relationship game.

To this end, we believe that Wall Street Journal’s Serena Ng was led astray by surface-level information surrounding P&G and their new accounts payable and supply chain finance strategy in an article with the somewhat misleading headline: P&G, Big Companies Pinch Suppliers on Payments.

The story reports that P&G “is looking to move its payment terms to 75 days and recently started negotiations with suppliers.” Ng suggests “P&G is actually late” to the extending payment terms game, as it “currently pays its bills on average within 45 days, faster than the 60- 100 days that other consumer products makers and large companies in other industries generally take, according to industry experts.”

Yes, Ng does point out that, “to help suppliers deal with the changes, P&G is working with banks that will offer to advance cash to suppliers after 15 days for a fee.” This only captures part of the actual payables situation and P&G’s broader strategy.

Sometimes the best of intentions get in the way of constructive outcomes. The WSJ article, like many news outlets, merely portrayed this as a story of a Fortune 500 firm stretching its suppliers to hoard cash. But the real story is often more nuanced than what is portrayed in the general business press or in trade publications. In this case, there are several reasons to dig below the surface.

Spend Matters Chief Research Officer Pierre Mitchell has worked with many folks from P&G over the years, and he has penned a response to the WSJ article based on our recent coverage on the invisible hand (à la Adam Smith) and the virtues and perils of that hand becoming increasingly visible in the Internet economy.

He says:

“It is my view that P&G is trying to create value here thoughtfully.  I don't come to praise P&G like many P&G disciples, but I also won’t bury it and throw it under the bus for its recent efforts.  In fact, I thought it would be worth writing down a list – it ended up being ten lessons long – in which some of the ways P&G’s working capital programs show how the invisible hand can be used to create a larger pie rather than just changing the size of the slices.”

We invite you to download our thoughtful response to the WSJ’s coverage: P&G: A Case Study of Supply Management’s “Non-Invisible” Hand in 10 Easy Lessons.

We hope that those who read it will come away with a level of nuance and insight about what P&G is really up to – not to mention critical lessons for all of us behind it – all the stuff that’s missing from the WSJ story.

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First Voice

  1. Robert Kramer:

    Jason, as you mentioned, the title of the WSJ article on P&G’s is misleading. Perhaps more importantly, it buries the lede.

    They key here is that P&G is moving suppliers to industry standard payment terms in a collaborative way based on industry benchmarks and the use of Supply Chain Finance (SCF) technology and services. P&G is offering SCF to suppliers who wish to get paid early at a discount rate of 1.3% per year. Suppliers moving from 45 to 75 days will actually save money as long as their cost of capital is greater than 2.6%. That’s because it’s cheaper to fund a 75 day receivable at 1.3% than a 45 day receivable at 2.6%. In addition, suppliers can improve their operating cash flow by taking early payment on day 15 instead of their current pay date of day 45. Finally, with SCF, suppliers are immune from buyers holding on to payments arbitrarily, for example at the end of a quarter or year. This improves cash flow visibility for suppliers. If P&G simply wanted to “squeeze” suppliers they would not offer them Supply Chain Finance and allow them to take early payment.

    Is SCF applicable for all suppliers? No. For the most part we’re talking about Global 2000 buyers, their “direct material” suppliers and their larger “indirect” suppliers. It’s usually not applicable for smaller suppliers (especially indirect) or one time spend. That’s where higher cost / lower touch solutions like P-Card and Dynamic Discounting have a role to play.

    By offering its suppliers SCF in conjunction with the term extension, P&G can improve its operating cash flow by $2 Billion and reduce total cost in the supply chain rather than just shifting costs. If I were a P&G shareholder, I’d be pretty upset with the management team if they didn’t capitalize on this opportunity, especially when SCF is available to actually improve supplier cash flow.

    Robert Kramer
    VP, Working Capital Solutions
    PrimeRevenue, Inc.

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