I’ve written before on the issue of cash flow, its importance to business, and the potential for companies to use it as a strategic tool as a part of a supply chain. It was therefore interesting to read an article in the business section of the Sunday Times today which was describing the plight of retail supply chains in the run up to the critical Christmas trading period.
Christmas is a period of critical importance for them as they can make in excess of half of their sales in this period. It was concerning to hear of companies that were passing on sales due to lack of cash for stock to fulfil them, large retailers lengthening their payment terms, and imbalances between players at various levels in the supply chain.
In good times when there are healthy sales and margins there is enough ‘slack’ in the supply chain to accommodate changes in demand, changes in terms, etc.. to ensure that the supply chain ultimately delivers and creates value for all involved. When you get to challenging times the slack has all but gone and the chain is often taught and under stress.
With the tougher trading climate what we are seeing, not unsurprisingly, is the most dominant organisations in a supply chain tightening their terms. Whilst this may help the Finance Director’s blood pressure, it can have repercussions as it gives less ability to flex as a supply chain and increases the risk of a link breaking. What they perhaps forget is that one of the inherent risks of a chain is that when a link breaks the whole chain can fail.
The easy and safe option is to follow the pack and tighten terms, however, if that means that your supplier can’t afford to stock their warehouse or innovate for next year then that will ultimately leave you in a worse position. Will they still be there for you when you next need them?
Often, whether it’s the reserves that banks hold or the trading terms in supply chains, what we see is that businesses react to the environment rather than pre-empting it. Ultimately, this exasperates their condition and accentuates the risks they face.
What should progressive organisations be doing? Well they should be taking a counter position. When times are good they increase their reserves, such that when times are tough they can then deploy them to remove some of the impact.
What you often find is that in good times money is expensive to borrow (to dampen inflation) and in challenging times money is cheap to borrow (to stimulate growth) and therefore by lengthening payment terms in good times and shortening in challenging times it can actually be better for the Finance Director’s blood pressure.
Whilst this isn’t the case for all companies, how many procurement professionals understand true cost and impact of the terms that they flow down? Some do, working with their finance colleagues closely, having simple tools to work out the cost of various payment terms, and using this to tailor the terms for different supply chains. However, they’re probably the minority.
Innovation in a functional context can be a completely new business model or something small such as a tool that can change the way that you negotiate and lead your supply chain, so how about a New Year’s resolution to see what you can do?