It was recently reported by the Forum of Private Business that smaller suppliers and subcontractors in the UK are regularly being left waiting for payments from government departments. Despite a public sector initiative that is meant to encourage payment of invoices within 10 days, it turns out that this is bypassing many small suppliers. News of this growing trend is worrying but not all that surprising. Relationships between buyers and suppliers are vital in order to maintain a working supply chain. However, during the economic volatility, these relationships came under increasing pressure. Naturally, as soon as the buyer decides to delay payment to its suppliers, their cash flow is affected, which can have repercussions further down the line.
Lines of communication
There are ways to ensure that the buyer/supplier relationship avoids some of these pitfalls though. Stefan Foryszewski, founder of global e-invoicing network OB10, told Supply Chain Digital that such a “business-critical” relationship needs to be carefully managed.
He observes that price negotiation is one of the most commercial benefits of successful supplier management. “The initial result of a good relationship is an open discussion which can examine pricing. It also unlocks the communication channels in order to discuss terms of trade which can ultimately improve operating terms for both businesses.”
He agrees that the recession put buyers and suppliers under an unusual amount of strain. “With credit conditions still tight, cash remains king. Because of this pressure, we remain in a conflicting set of circumstances where customers are trying to lengthen terms while suppliers are trying to receive funds more quickly.”
Thanks to the Forum of Private Business’ relentless campaigning, it has implemented the Prompt Payment Code, which comprises a list of companies pledging to pay smaller suppliers on time and in full. Earlier this year, Bacs Payment Schemes Limited (Bacs), the organization behind Direct Debit and Bacs Direct Credit, reported that in December 2009, British SMEs were having to wait an average of 41 days longer than their original agreed payments terms before invoices were being paid. This was an increase of 9.5 days on the time SMEs were waiting, beyond agreed deadlines, in June 2009.
Recent pressures point to the fact that it is wise for buyers and suppliers to keep the lines of communication open at all times. Stefan expresses a similar point: “Good communication is also a key attribute – how and when suppliers want to be paid is a simple question but it’s one that too many businesses overlook.”
In August, Ford Motor Company revealed it was simplifying how it works with suppliers by “reducing complexity and expanding part commonality”. It already has a network of key component and service suppliers, called Ford’s Aligned Business Framework (ABF), which helps with long-term collaboration. Birgit Behrendt, Executive Director of global programs and Americas purchasing, said: “The ONE Ford transformation is improving competitiveness not just for Ford, but for our suppliers around the world.”
As part of the ONE Ford plan, the company will build 72 percent of its vehicles off 15 core platforms by 2012. The idea is to work closely with suppliers to take advantage of efficiencies throughout the vehicle development process.
“These types of improvements would not be possible without a globally integrated Ford working closely with a supply base that is also coordinated around the world,”
Ford has recognized the benefits for both parties if it works closely with its suppliers to make cost savings and increase efficiencies. The company has also worked at standardizing its supplier relationships, which establishes a level of consistency.
“Buyers need to work with suppliers to manage their expectations and agree to realistic terms that work for both sides,” explains Foryszewski.
Setting out the terms of the agreement from the start is vital. Then, if the relationship does come under any strain or any problems arise, the terms are in place and supplier and buyer can proceed in the agreed manner.
He adds: “If buyers are able to foster a successful relationship, they should be able to try and increase the willingness to deliver goods and services more promptly which will be achieved through a good supplier manager, but also by on time payment.”
So the buyer/supplier collaboration works both ways and has to be advantageous to both organizations. If one party feels as though they are not getting anything from the relationship, it could put it in jeopardy.
Now is the time for companies to be evaluating the value of their supply base, and for suppliers to ensure that its buyers are meeting the agreed terms.