Not paying suppliers is NOT a winning business strategy

By Clare Goldsberry
Published: April 19th, 2013

Consumer products giant Procter & Gamble has made the news twice lately. PlasticsToday reported on the company’s laudable “zero manufacturing waste” initiative. BRAVO! The Wall Street Journal reported (April 17, front page) on companies that “pinch payments” to suppliers. Leading off that article was Procter & Gamble, which, reporter Serena Ng noted, “is planning to add weeks to the amount of time it takes to pay its suppliers, a shift that could free up as much as $2 billion in cash . . .”  BOO!
   
Of course this isn’t a new game to those molders and moldmakers that serve many of the biggest and best OEMs in North America. It was a trend started by GM’s purchasing head back in the early 1990s, Jose Ignacio Lopez, whose name became synonymous with bad business practices. Well, bad for the suppliers anyway. But who gives a darn about suppliers?
   
P&G, the WSJ article noted, wants to move its payments to suppliers from 45 days to 75 days. But of course, P&G is going to help suppliers deal with this change in terms by “working with banks that will offer to advance cash to suppliers after 15 days for a fee.” Gee, thanks so much for your kindness, P&G!
   
The “fee” of course will—or should be—added to the cost of goods sold to P&G, so their prices will go up and consumers will pay more for P&G products. That’s how the free market system works, right?
   
There’s a saying, “If I owe you, you own me. If you owe me, I own you!”
   
At a time when the automotive OEMs are constantly evaluating the risk inherent in their supply chain and finding ways to mitigate that risk, P&G has a lot to learn about paying their suppliers. We all know stories of molders and moldmakers who were put out of business by their OEM and Tier One automotive customers. But can we blame the OEMs?

Part of a good marketing strategy is knowing which customers you want and which ones you don’t, and making plans to get rid of the ones who don’t pay, or you can’t make money on even if they did pay, or are just a general pain that are more trouble than they’re worth.

Many years ago, I did an article that addressed many molders’ dilemma: At what point do you shut off the presses and quit shipping parts? When the customer hasn’t paid for two months? Six months? At what point do you place a lien on the molds? After a year? Two years?

Let’s face it—it’s a David and Goliath scenario. P&G is a Goliath, and many of its suppliers are Davids. They are small and medium-sized enterprises that P&G could swallow in one gulp. They can’t wait nearly three months to be paid for parts. And most can’t afford the fees associated with P&G’s gracious offer to find them a bank that will advance them the money until P&G decides to pay them.

The WSJ article notes that the “cost cuts and cash freed up by taking longer to pay suppliers will give P&G more flexibility to manage its finances.” Gee, we’re so happy that P&G will have more flexibility to manage its finances!! Meanwhile, it will put many suppliers in a straitjacket!

If a big OEM owes you a lot of money, you have power. Many smaller suppliers don’t realize the power they do have over a big OEM. You have the power to put a lien on the mold or hold the mold until it’s paid for. No mold, no molded parts. You have the power to shut off the press and sit on the parts until you get paid for all the parts you’ve shipped for the past six months. Parts are critical to the OEM customer’s ability to manufacture their products. One missing 5-cent plastic part can shut down an entire production line and when that happens, boy do those guys scream.

If OEMs are truly worried about the health of their supply base—as I’ve written about so many times recently concerning the automotive industry—then they should understand that good cash flow isn’t just for them. Their suppliers need good cash flow, too, if they are to stay in business and keep the supply of molds and molded parts flowing.

Gouging suppliers with another “Lopez-like” scheme to stall payments to suppliers creates a negative situation for everyone involved. And the Goliaths should remember that all it takes is one little stone—or missing part—to cause them big headaches.

Mitigating risk in their supply chain is a big deal for these big companies. Maybe mitigating risk in their customer base should become a big deal for suppliers.

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