New Survey: Customers' Forced Extended Payment Terms Squeezing Supply Companies

APQC research shows 66 percent of survey respondents have one or more key customers that force late payment terms - sometimes beyond 90 days - hindering their business operations.

Nov 02, 2015, 10:57 ET from American Productivity & Quality Center (APQC)

HOUSTON, Nov. 2, 2015 /PRNewswire/ -- Companies that began forcing extended payment terms on suppliers in response to the 2008 financial crisis are still extending payment terms as a matter of policy and are creating significant and sometimes dire consequences for suppliers, according to a new survey from research firm APQC.

As a consequence, many suppliers report having to take on additional debt to fund operations and are unable to expand, hire, or give employees raises.

Most disturbing, 57 percent of respondents say it's likely some vendors will need to exit their markets as a result of extended payment terms.

"The subject of extending payment terms is a very sensitive one, with many small business CEOs unwilling to go on the record for fear of offending their large-corporate clientele or setting off alarm bells with lenders and employees," says Mary Driscoll, senior research fellow, Financial Management, for APQC.  "Our findings confirm that the practice of extending payment terms has negative consequences for both supplier companies and for the economy as a whole, as 54 percent of respondents indicate that extended terms are likely to inhibit their ability to expand their businesses.  As they respond in a similar fashion with their suppliers, a ripple effect up and down the supply chain is created and eventually even the largest companies will be negatively impacted."

Of the 105 supplier executives surveyed in APQC's study, several voiced comments that reflected the severity of the situation they face.

"Like most companies, we face bills that have to be paid every month.  When customers take 90 or 120 days to pay us for products we've already delivered, it creates extreme cash flow problems," said Ted Nixon, CEO of D.D. Williamson & Co., the world's leading caramel coloring maker.  "This makes planning for growth and better service to those same customers more difficult.  Everyone loses in the long run."

Larry Marion, CEO of Triangle Publishing Services Co. Inc., added, "One of my largest revenue sources, a huge global tech company, last year began to slow its payments by eight to 10 business days.  Even though we had written agreements that said payments were due in 30 days, it unilaterally began to delay by a week or so.  Another long-term supplier and partner unilaterally changed to 45 days, without any notice or negotiation."

The data from APQC's research backs up the anecdotal comments of these and other supplier executives.  In its survey APQC found that:

  • Extension of payments had little to do with real need as 67 percent of respondents cite their customers' desire to improve working capital despite good cash flow; another 45 percent believe their customers feel the need to polish their profit profile by extending payments.
  • In a finding that has implications for job growth, 54 percent of those surveyed fear they will be unable to hire more workers.
  • Delayed payments also affect pricing. Seventy-four percent worry that cash squeezes that result in negative repercussions for their own vendors are likely to result in price increases, due to increased operating costs.
  • Nearly 72 percent of respondents believe buyers will also ultimately end up paying higher prices because of the price increases they will have to implement as a result of delayed payments.

While some small business executives express concerns that their ability to competitively manufacture and invest in growth—not to mention their very survival—is being threatened, APQC found that some suppliers are exploring creative negotiating tactics with their leverage-wielding customers.  For example, a few indicated that small price reductions of one or two percent will be accepted for certainty that payment will absolutely be made within 10 days. 

"At the end of the day, it's understandable that large companies are dedicated to cash-flow efficiency, but when that dedication devolves into callousness toward vulnerable suppliers, everybody—even the largest customers—will eventually lose," adds Driscoll. 

For a copy of the DPO Extension and Financial Pressure report visit www.apqc.org.

For further comment on the survey and its implications for business, please contact:

ABOUT APQC

APQC is a member-based nonprofit and one of the leading proponents of benchmarking and best practice business research. Working with more than 500 organizations worldwide in all industries, APQC focuses on providing organizations with the information they need to work smarter, faster, and with confidence. Every day we uncover the processes and practices that push organizations from good to great. Visit us at www.apqc.org or @APQC and learn how you can make best practices your practices.

 

SOURCE American Productivity & Quality Center (APQC)



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