Why Walmart Does Not Delay Payment by One Day
In it, Alan essentially argues that the financial benefits of extending payment terms is outweighed by the benefit of supplier relationship management or SRM by a significant factor. His research over seven years across over 1,200 organizations has shown organizations that are good at SRM achieve on average 4% to 6% annual post-contractual benefit (that is 4% to 6% over the agreed contractual terms) from their strategic suppliers.
I won’t spoil all the good bits, so go read it, but I wanted to add to the discussion.
A typical large company breaks their supply base into key segments (both cost of goods suppliers, ie, direct materials, and general, services and administrative or GSA suppliers or what is commonly known as indirect). This impacts a number of things, and from my trade finance perspective, how lenders need to address financial payments and credit.
I was listening to a presentation from the head of procurement from a large CPG Fortune 500 company that had 160,000 suppliers (of which 10,000 are for production and 150K are indirect). They had the following segmentation:
- Top 15 Innovators – These were their top relationships, companies they shared Intellectual Property, business plans, and strategy with to help reduce costs and improve wallet share together.
- 50 Joint Business development vendors - These were suppliers that they needed as they looked to grow where large companies typically grow (ie, Emerging Markets, BRIC, etc.)
- Top 10 suppliers by category – Interestingly, some suppliers may be small but critical to a brand or product. As an example, cocoa may not be an important ingredient to this company, but may be very important to one of their main brands.
- The next 500 vendors after the above - These are typically large counterparties that can supply both direct or indirect – think IBM or ExxonMobil supply resins.
- “The Rest” - Business as usual vendors. There were ones they looked to drive down costs with the source to pay process, from using eRFP, auctions, pcards, etc. These suppliers are probably referred to many times as SMEs- Small, Medium enterprises. Included in this mix would be your diversity suppliers.
So how does this Impact Finance?Typically very strong suppliers will have access to the capital markets and or be supported by many banks as part of their revolver. But as an Anchor company (the Fortune 500) expands into new markets, other suppliers may need to build factories and or put in other capabilities to supply them. This requires capital. In addition, many of these larger suppliers are offered some form of supply chain finance, but it may not be in the jurisdictions where the funds are needed. Of course, suppliers that probably need the most help come in “The Rest’ category and have challenges around how you service them from a finance perspective given lack of adequate information.
Alan’s point about cost-benefit certainly makes a lot of sense. My only add-on is that a supplier is not a supplier and these counterparty relationships are typically much more complex at the large to large end.
Extending payment terms is only one of many variables that need to be examined. It’s why Walmart just does not go ahead and delay payment by one day – given their outstanding payables, it would have a large positive impact on their balance sheet, just changing terms by a day. Why don’t they? Because to Alan’s point, they can’t measure the impact on public relations, on a supplier pricing its' merchandise, on supplier failure, etc. That’s why you don't shoot yourself in the foot.