Of late, the trend of extending payment terms to suppliers should not be any new news to many of our Supply Chain Matters readers since such practices continue to gain multi-industry momentum. Such momentum continues because private equity firms and high powered consultants in finance now advocate and practice this tactic as a means to boost earnings and operating cash flow. However, what we view as an even more disturbing trend is current more aggressive efforts by suppliers to now push back by exercising whatever options they have, up to and including significant supply disruptions.
To ascertain the scope of the trend towards extending payments to suppliers, we exercised a Google search this morning on the term: News- suppliers not being paid. That search yielded and eye-popping 9.7 million item results, an obvious indication of industry-wide trending.
Just about a year ago, Bloomberg published an article: Big Companies Don’t Pay Their Bills on Time. The author, Justin Fox attributed the increased trend among large global companies to extend payments to suppliers to two principle influences. The first was Amazon, that being yet another aspect what we often describe as “the Amazon effect.” In essence, the online retailer had a cash conversion cycle of negative 24 days in 2014, meaning the online retailer received cash from customers 24 days before it was paid out to suppliers. The other major influence was noted as Brazilian private-equity firm 3G Capital which has acquired well known consumer brands and operates primarily today as Anheuser-Busch InBev. A chart in the Bloomberg report indicates that since the acquisition of Anheuser in 2008, supplier payments stretched to near 260 days by 2014 with InBev on-average paying suppliers 176 days after the company was paid by customers. That is nearly six months of cash float.
Similarly, after previously attending this year’s Institute of Supply Management (ISM) annual conference, this author penned a blog commentary on a session where private equity firm representatives leveraged their stated tactic of operational intervention and improvement, namely concentration in procurement policies to harvest cash flow and margin savings.
The Bloomberg article further charts well-known names Procter and Gamble, Mondelez and Kimberly-Clark, who collectively have to now respond to 3G’s industry presence with the acquisition of both Heinz and Kraft. in the consumer-goods sector. By 2014, days payable outstanding for all three had grown to between 70 and 85 days.
And so the ripple effect of this trend continues offering the brand owner opportunities to leverage cash flows, product margins and profitability, while the ripple effects cascade down the to the remainder of the supply chain.
The open question now remains as to what are various industry norms for paying suppliers, and invariably, the principles of supplier survival and stakeholder interest come into play when such practices become more wide-spread. More and more, such incidents seem to be on the increase.
In early July, General Motors encountered a brief supply disruption over a contract dispute and bankruptcy filing from Clark-Cutler-McDermott Co. a component supplier for 175 acoustic insulation and interior trim parts that are apparently utilized in nearly every vehicle GM produces in North America. The supplier stopped producing parts for GM after work shifts on a Friday and laid off its workforce. Subsequently the supplier refused to grant GM access to any remaining inventory or production tools forcing GM layers to enter a legal process proceeding in bankruptcy court to gain rights to tooling and any leftover inventory.
In late July, avionics producer Rockwell Collins issued a public statement directed at Boeing, indicating that the commercial aircraft producer owed Rockwell $30-$40 million in overdue supplier payments and noted as a breach of contractual supply agreements between the two companies. Rockwell supplies cockpit avionics displays for the Boeing 787 and newly developed 737 MAX aircraft. The CEO of Rockwell openly indicated in his firm’s report of financial performance that Boeing had contributed to Rockwell’s reported financial shortfalls. In its reporting, The Wall Street Journal observed that the industry relationship among Rockwell and Boeing was previously noted for positive collaboration in ongoing cost-control efforts resulting in Rockwell gaining additional supply contracts involving other produced commercial and military aircraft.
Similarly, British based GKN, a supplier of cabin windows, ice protection systems and winglets, openly called Boeing to task for extending supplier payments. Both Reuters and The Wall Street Journal had earlier reported that to boost its cash flows, Boeing was extending supplier payments from 30 days, too upwards of 120 days while at the same time continuing efforts to scale-up the supply chain to address upwards of ten years in booked orders.
The most recent public incident of outright supply disruption is now Volkswagen dealing with the possibility of reduced working hours involving multiple German based final assembly plants resulting from a supplier dispute with two suppliers, Car Trim and ES Automobilguss. Car Trim reportedly supplies parts for seating and ES Automobilguss produces gearbox components for a variety of different VW car models. As of today, business media is reporting that negotiations are ongoing to resolve the matter after the suppliers cut component supply deliveries feeding four final assembly plants. The suppliers have denied responsibility for the situation, indicating that VW cancelled contracts without explanation or compensation and the decision to halt delivery was taken to protect their own workforces. As we pen this posting, upwards of 10,000 workers at VW’s main plant in Wolfsburg, Germany are close to being idled due to parts shortages. Both suppliers, which are part of holding company Prevent, have denied any responsibility in the pending supply disruption claiming that VW is responsible for creating its own supply crisis because of the lack of timely payments to suppliers and that the suppliers’ decisions were taken to protect their own workforces and financial health.
Thus we observe a common theme beginning to manifest across different industry supply chain settings, more aggressive supplier push-back to existing payment terms and the transfer of the burden of cash-flow.
In prior Supply Chain Matters postings, this Editor has not been very keen on such strategies namely because of the short and longer-term havoc imposed on supply chain capabilities and ongoing relationships. But, with the realities of the current business environment being what they are, and with so many firms now under the short-term professional looking glass, the elongated payment strategies extend, testing such relationships. This is obviously not healthy, and many other voices are beginning or have already concluded as-such.
Our prior advice to procurement professionals was essentially to be forewarned and prepared since those possessing or prepared with termed financial engineering skills can reap some short-term financial and other bonus rewards.
We now extend advice to the broader supply chain management leadership and operations management communities. If you have little choice but to exercise such strategies, best be prepared for the new consequences of supplier push back and potentially harmful supply disruptions and eroded supplier relationships.
The age old adage remains that long-term success is built on two-way, win-win relationships. An I win-you lose relationships helps lawyers to stay gainfully engaged and your supply chain to be in constant jeopardy. When times are good, such strategies can yield some benefits. When times are challenged, such as the 2008-2009 global recession, they often lead to massive supply disruptions or calls for mutual sacrifice from suppliers. They further lead to missed opportunities for joint-collaboration on product and process innovation since suppliers are indeed savvy to stick with customers to consistently try to adhere to win-win relationship building.
© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.
Supply Chain Matters has on several occasions praised Andrew Liveris, Chairmen and CEO of Dow Chemical Company for his understanding and appreciation for the value and contribution of manufacturing and supply chain capability to business outcomes. His pearls of wisdom shared with other CEO’s of manufacturing companies note that in manufacturing, you have to constantly innovate faster than being commoditized, and that the biggest manufacturing and supply chain challenge stems from the ability to train a new skilled workforce.
We were therefore rather disappointed to read recent news that Liveris has indicated that he will leave Dow Chemical by mid-2017 as a result of the announced $120 billion merger with DuPont brought about from the influence of activist investors. The merged companies, if approved, expect to split into three separate specialty chemical businesses. But before that occurs, there is an anticipated $3 billion in cost cuts.
Earlier this month. Dow indicated that Vice-Chairman and COO James Fitterling will oversee the merger with DuPont which was reported by business media as an indication that that a certain activist investor did not favor Mr. Liveris in a senior leadership role in the new to be companies.
Besides his nearly ten year leadership of Dow, Mr. Liveris has been an author and U.S. presidential advisor on manufacturing competitiveness. In a September 2013 commentary, we praised his keynote delivered to the MIT Production in the Innovation Economy (PIE) conference which unveiled results of MIT’s study on U.S. manufacturing competiveness. In the first quarter of 2015, in a posting appearing in the online version of Chief Executive Magazine, Mr. Liveris shared what he termed as his winning formula for manufacturing success. His prime messages was for manufacturers to rethink the role in evolving global supply chains and actively address workforce training and development needs for today and the future.
We certainly hope and trust that Mr. Liveris will consider continuing to be an educator and mentor for advocating U.S. manufacturing and supply chain competitiveness. His articulation of why manufacturing and supply chain capability matter and his leadership presence are one that needs to sustain.
The biggest news last week and perhaps for all of 2015 was the announcement that long-time rivals Dow Chemical and DuPont‘s intend to merge into a specialty chemicals giant of more than $120 billion. There are stated plans to split both enterprises into three separate companies providing different specialty chemical based product offerings.
This proposed deal has obvious massive implications.
Saturday’s edition of The Wall Street Journal carried the headline that this deal cements activists’ rise. A profound quote of that article stated:
“While they (activists) have become increasingly powerful in recent years, forcing companies to do everything from buying stock to selling assets, their ability to help bring about such a monumental deal represents a new high.”
Today, the WSJ further described long-simmering hostilities between Dow CEO Andrew Liveris and activist investor Daniel Loeb which reached a boiling point this weekend after the announcement on Friday. Loeb apparently declared that this deal was too rushed, and called for Liveris’s resignation.
In October, former Dupont CEO Ellen Kullman suddenly resigned after fending off one of the most prominent wave of activist investor assault on a corporate board. Kullman was succeeded on an interim basis by board member Edward Breen while the company searched for a permanent replacement. Breen, whose resume includes being Chairmen and CEO of Tyco International worked with Dow CEO Andrew Liveris to orchestrate this deal.
Our Supply Chain Matters initial perception is that the announced deal provides a significant new and scary watershed as to the degree of influence that activists portend to have on corporate CEO’s. That is qualified, however, as to whether government regulators would allow this deal to go through given the significant implications. Analysts at Piper Jaffrey were quoted as indicating: “The global natures of the antitrust hurdles are likely to be significant.”
The National Farmers Union (NFU) has already expressed its frustration for yet another enormous merger. NFU President Roger Johnson declared: “Having just five major players remaining in the marketplace would almost certainly increase the pressure for remaining companies to merge, resulting in even less competition, reduced innovation and likely higher costs for farmers. This announcement, combined with the on-again-off-again Monsanto/Syngenta merger, is creating a marketplace where farmers will have very few alternatives for purchasing inputs.” The National Corn Growers Association declared it will do all it can to protect farmer interests and preserve an open and competitive marketplace.
Do not be surprised to read of other such declarations.
Since both of these global companies supply materials at the lowest echelons of many different industry supply chains, this proposed merger has significant internal and external implications from many industry value-chain supply dimensions. These will unfold over the coming days and weeks and will likely take on market, technology and human resource dimensions, since the cost and the scale of this merger is momentous and far-reaching. How long the regulatory approval process actually occurs is likely anyone’s guess.
One thing is certain however, the specialty chemicals industry has reached a watershed moment, one that will likely redefine industry players and their associated supply chains for many years to come.
There has been much reporting within social and business media regarding the potential industry supply chain disruptive effects of the recent massive warehouse explosions that affected the facilities adjacent to the Port of Tianjin.
It is rather important and crucial that industry supply chain and sales and operations team obtain meaningful and insightful information regarding what is happening on the ground as well as the potential short or long-term supply chain impacts, if any.
We at Supply Chain Matters are disappointed to observe that certain technology and service providers are attempting to utilize this tragic incident as a backdrop to product marketing outreach campaigns. Neither should technology providers suddenly become news outlets.
Not good ideas by our lens.
Supply chain technology providers should instead continue to educate on the benefits of the technology they provide and allow industry supply chain teams to receive clear, unfiltered and unbiased insights and information from informed and educated sources.
One of the better Tianjin perspectives Supply Chain Matters has reviewed to-date ia a published white paper: The Aftermath of the Tianjin Explosions: A Global Supply Chain Impact Analysis, authored by supply chain risk management provider Resilinc.
While this 24 page white paper does include some product marketing, along with requiring registration, the bulk of the report provides meaningful and insightful information related to potential immediate, near-term, medium and longer term supply chain impacts.
The paper concludes that the less apparent ripple effects of the warehouse explosions will be felt weeks, months and even years to come.
The paper provides meaningful background information regarding this vital logistics and manufacturing hub, which services industry needs of automotive, commercial aerospace, high-tech, petrochemical and general industrial manufacturing supply chains, among others. It further outlines important mapping of industrial manufacturing and supplier concentrations within close proximity of the explosions, based on a mapping of over 30 sites in a 2-10 mile radius of the blast. Four large industrial zone districts are adjacent to the port, with the port serving as what is described as the largest free trade zone in northern China, and the second largest Vehicle Processing Center for importing and exporting of automobiles.
On the topic of near-term ripple effects, the Resilinc analysis predicts that extensive delays can be expected for most companies and sites moving products through Chinese ports as government agencies deal with the after-effects of a regulatory environment needing extra attention.
There are predictions that Tianjin port operations will only begin to resume normal operations by approximately mid-September, and that any containers now at the port will be inaccessible for the next two months, even if they are intact. Resilinc indicates that for any suppliers located within 2-15 miles of the explosions, companies may presume 12-16 weeks of delays.
Long-term impacts outlined related to the ripple effects of increased regulatory actions impacting certain industry sectors including the location and storage of goods near large population centers.
Regarding potential long-term impacts, the paper cites Chinese media as indicating the economic cost of Tianjin crisis could be as high as $8 billion.
If your organization is dependent on operations, logistics partners, suppliers or service providers in the Tianjin area, we recommend you review this report which can be accessed at the following Resilinc web link. (Some personal registration information required)
Supply Chain Matters has in the past cited Andrew Liveris, Chairmen and CEO of Dow Chemical Company for his understanding and appreciation for the value and contribution of manufacturing and supply chain capability to business outcomes. Besides his current leadership of Dow, Mr. Liveris is an author and U.S. Presidential advisor on manufacturing competitiveness. In a September 2013 commentary, we highlighted his keynote delivered to the MIT Production in the Innovation Economy (PIE) Conference which unveiled results of MIT’s study on U.S. manufacturing competiveness.
Thus we were pleased to be alerted to a commentary appearing in the online version of Chief Executive Magazine where Mr. Liveris shares his winning formula for manufacturing success with other chief executives. His prime messages was for manufacturers to rethink the role in evolving global supply chains and actively address workforce training and development needs for today and the future.
One of the more powerful statements brought out in this interview article deserves highlighting:
“Entrepreneurial action and its ability to pivot, according to the world we face, is one of America’s greatest attributes. Manufacturers, for far too long, did not really display agility when global competition disrupted supply chains. We are in a different world. We’re traveling at the speed of flight. We are so connected to the information age without realizing that we’re still at the dawn of it. The smarter companies have figured out their place in the global supply chain and have adjusted their service and product models accordingly.”
Those statements are rather powerful when considering that they come from a CEO. They reflect the new awareness to supply chain’s contribution. Within his own industry, Mr. Liveris points out that of the top 20 global chemical manufacturers in 1990, 17 disappeared by 2010. Dow prevailed because of its ability to pivot to dramatic market changes.
A further pearl of wisdom:
“Manufacturing today means you’ve got to innovate faster than they commoditize you.”
On the all-important skills challenge:
“The biggest issue we have is training a new skilled workforce to deploy against that value add, and for me, that is the key topic in manufacturing today. We need technically trained people at the German skill level, in automation, robotics and fine-precision manufacturing. This is the world that we’re in today and we’ve got to adjust to it, and frankly that’s what I spend my time on.”
From our lens, there needs to be many more global manufacturing firm CEO’s possessing the wisdom of Andrew Liveris, one’s that understand that supply chains and manufacturing capabilities do matter.