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 highlighted a number of supply risk and potential ingredient safety challenges impacting pharmaceutical and drug supply chains of life-critical medications and yet such challenges seem to persist, often in the same dimensions. A recent Bloomberg published article highlights the latest involving cancer-drug shortages with supply chain ingredients continuing to be sourced from banned Chinese producers. The open question is why the industry continues to foster such sourcing practices.
When we launched Supply Chain Matters back in 2008, one of our first series of commentaries concerned supply chain risk management, specifically the issue of the tainted pharmaceutical drug heparin that originated from Chinese based suppliers. At the time, tainted batches of the prime API compound that produces heparin, a key life-saving drug utilized as a blood thinner, were found to later contain over sulfated chondroitin, an altered version of the required chondroitin sulfate. Instead of sourcing this active API from designated pig intestines, the tainted API apparently came from shark cartilage. This specific incident was directly attributed to the death of 80 persons and many others became seriously ill. Our 2008 commentary, Will FDA Inspectors in China Solve Product Safety Issues?, questioned whether regulatory agencies were ill equipped to keep up with the pace of global outsourcing of pharmaceutical compounds and specifically getting a handle on the increasing occurrence of counterfeit or non-conforming products.
In 2012, the pendulum shifted towards global-wide shortages of life-saving drugs due to a number of domestic and global-based API suppliers either unable to produce required quantities or having to temporarily suspend production operations because regulatory inspections citing lapses in good manufacturing practices. Agencies subsequently had to alert doctors and healthcare providers that in the light of severe shortages of hundreds of drugs, there were clear signs that unauthorized or counterfeit versions of these drugs had infiltrated global supply chains. The U.S. FDA alerted to the appearance of “non-FDA approved injectable cancer medications” and later, patients and drug companies were subjected to counterfeit versions of the drug Avastin, widely prescribed to treat brain, colon, lung and kidney cancers. Swiss drug maker Roche, and its Genetech unit, the global producers of Avastin later indicated that counterfeit versions of its top-selling cancer drug, ones without any active ingredient, were being circulated in the U.S. Patients receiving this counterfeit version would thus not have received required therapy, or worse, could suffer potential harm.
The latest iteration outlined in a recent Bloomberg Businessweek article cites data from the National Academy of Medicine indicating that more than 80 percent of ingredients used in drug manufacturing are now produced externally, primarily in China and India. Further cited is an incident where the U.S. FDA inspected a Chinese production facility in early 2015 and uncovered what was termed “broad data manipulation” resulting in a warning letter to plant owner Zhejiang Hisun Pharmaceutical. That subsequently led to an indefinite ban for this facility in September 2015, a first for one of China’s leading exporters of pharmaceuticals. However, according to this report: “…to avoid possible drug shortages, the regulatory agency allowed the Hisun facility to continue to export about 15 ingredients used for drugs produced in the U.S., including nine components of cancer medicines.” The report goes on to explain the delicate balancing act regulators currently face in insuring adequate supplies of life-saving drugs while de-facto transferring the burden of assuring safety and quality inspections to end-item drug manufacturers themselves. End-item drug producers are therefore asked to perform additional inbound testing, hire independent auditors or take other mitigative actions. Overall, Bloomberg indicates that the FDA has for the current year added 13 plants to its listing of banned plants, with a cumulative total of 52 classified banned plants.
We found that statistic to be staggering and alarming. Once more, we wonder aloud about the strategies that have led to increased outsourcing to lower-cost production regions, especially for drugs that are held to such high specification standards and currently sold for staggering margins in developed countries. One has to wonder aloud as to why.
According to the Bloomberg report, among the 15 API’s from the subject Hisun Taizhou plant that can be exported by exception, most are widely used for producing chemotherapy treatments for leukemia, breast and ovarian cancers. One would surmise that these drugs are expensive. A former FDA official who once was responsible for domestic and international investigations indicated to Bloomberg of his belief that not all U.S. companies are ensuring the safety of ingredients purchased from known banned factories.
Regulators such as the U.S. FDA are indeed placed in a rather difficult position in trying to assure that life-saving drugs remain in adequate supply in the light of an overall industry trend to source compound ingredients from lower-cost production regions. Critical drug shortages of expensive drugs lead to the creation and distribution of counterfeits which obviously adds to overall safety concerns.
Yes, drug markets serving China and India should come with government controls that require far lower costs to healthcare providers and patients. Drug companies continue to extract far higher end-item drug costs for distribution among highly developed countries and economies. Ingredient sourcing and quality conformance strategies should align.
The pharmaceutical and drug industry has often been in media headlines portrayed as profit-grubbing villains. In some cases, that may be underserved, since research, development and production costs for life-saving drugs are rather expensive. However, when the industry continues to pursue supply chain sourcing strategies that are driven more by lower-cost and do not insure adequate safeguards, than they need to be called out. Armies of FDA inspectors chasing endless foreign producers are a Band-Aid to a broader challenge of supply chain sourcing.
There was noteworthy acquisition news in the procurement software applications area last week with the announcement that BravoSolution had acquired privately-held procure-to-pay applications provider Puridiom. This transaction is further evidence to the growing importance of broader-based suites of applications as well customer attractiveness to purchasing technology that can manage broader procurement lifecycle needs that extend the touch points involved in supporting strategic, tactical and day-to-day operational procurement process needs.
Terms of this acquisition were not disclosed. The joint release does indicate that the acquisition is effective as of August 1, 2016 and that the integration of staff and technology resources has begun. The Puridiom technology will over the coming months be embedded into the BravoAdvantage technology platform. The founder of Puridiom, Jesus Ramos will also become a senior vise-president of procurement solutions for BravoSolution.
According to BravoSolution CEO Jim Wetekamp, the acquisition accelerates that provider’s plan to become a source-to-plan market leader with extended tactical and operational procure-to-pay capabilities. Bravo was searching for an augmentable technology provider with deep procurement domain experience, an agile software application offering both Cloud and behind-the-firewall deployment options along with proven external applications integration capability. Puridiom, founded over 30 years ago, has been supporting tactical procurement processes for private and public-sector organizations.
Supply Chain Matters had the opportunity to speak directly with CEO Wetekamp regarding this acquisition. Our focus was the perspective of the broader supply chain management business process umbrella, not solely procurement itself. From the customer lens, Wetekamp articulated Bravo’s mission in enabling strategic procurement, fulfilling an increasingly important role in today’s organizations. He acknowledged that increasingly, customers are viewing procurement technology as not so much a central point of control but rather an integration of multiple touch points across other broader supply chain business process management needs such as product lifecycle management (PLM), materials and supply chain planning, logistics and transportation, customer services and other areas. The reality is that engineers, transportation and service professionals are already directly involved in sourcing decisions and require an integrated platform for the sharing of specifications, item-masters, product catalog, contract management and compliance information.
From a broader market perspective, there is a need for abilities to support indirect as well as direct material procurement processes across a more integrated suite that includes a unified data model, as well as the ability to support different or unique industry specific needs. The acquisition of Puridiom affords the opportunity to now include integrated P2P process and decision-making support in a unified BravoAdvantage data model.
Wetekamp indicated that the decision to fully integrate Puridiom as opposed to continuance as an independent brand offering was to accelerate the integration process into the BravoAdvantage framework in respect to unified data modeling, common look and feel, average application response times as well as a common inbox for suppliers. He indicated that there is no significant overlapping functionality with Puridiom which will aide in the overall integration.
Regarding the overall Puridium timetable, the CEO indicates that phase one of the planned integration, expected for Q1-2017, will feature a harmonized user experience, Cloud and behind the firewall deployment options as well as inclusion in the overall BravoAdvantage analytics framework. Phase two which includes full integration of all master data is currently planned for Q1-2018, a year later.
One of our Supply Chain Matters takeaways from this acquisition announcement is that BravoAdvantage has the opportunity to be an alternative for broader procurement lifecycle management support option among today’s mid-market ERP customers who require broader procurement touch point or deeper vertical industry support needs. As an example, Bravo’s existing transportation services procurement tendering and procurement support capabilities are impressive and can assist mid-market and other firms in distribution sensitive manufacturing or services needs.
© Copyright 2016. The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All rights reserved.
From time to time, Supply Chain Matters will highlight what we believe our technology and services providers that are providing unique or differentiating technology approaches in supporting business process needs. In this commentary, we profile Powerlinx, a technology that supports the ability of companies to quickly search out potential strategic partners.
VentureBeat describes this provider as “the eHarmony of business”, providing a technology that can more quickly identify potential partners utilizing advanced data discovery methods. In essence, the technology is similar to that utilized by prominent social media sites such as Facebook or Linked-In that leverage graph data discovery methods. The twist is the application to search out potential partners such as new suppliers, advanced technology providers, industry expertise or to be discovered by other firms for specific capabilities and traits. Thus, it can avoid the need for hiring business advisers and consultants to engage in a time consuming search activities.
The firm was founded in 2012 by former Dun and Bradstreet executives and dedicated its first two years towards developing what is now described as the proprietary PowerScore platform utilizing text mining and natural language conversion techniques, This platform recently went live in March of this year, and we were informed that it is currently populated with 85 million potential partners spanning 165 countries. The technology provider is also now discovering its value to manufacturers and supply chain management teams.
To populate this data store, developers scanned available primary sources such as company web sites, news releases, media mentions and other sources. A proprietary PowerScore™ algorithm analyzes a wide variety of metrics to provide a quantitative measure of a company’s compatibility with a potential partner.
Inferences are drawn among various data store partners regarding areas such as stated objectives, current or past relationships, successful relationships or other known strategic partners. Partners further have the ability to control which matches that would like to approve or be displayed. Our briefer, Yoni Cohen, Head of Product, was quick to point out that the data store is sensitive to any proprietary information and will protect such information. Partners’ in-turn have the ability to also limit any sensitive information.
To springboard customer adoption, Powerlinx currently offers a three-tiered pricing model to appeal to various user groups. The no-cost entry level Basic plan was designed for companies looking to grow, finance or exit a business and places a defined limit on the number of searches that can be conducted while providing the opportunity to respond to inbound opportunities identified by the platform. The two other tiers, Professional and Power provide support for unlimited matches with added hands-on Powerlinx consultant services. Pricing is rather attractive; a Professional subscription is currently priced at $100 per month or $1000 pre-paid for an entire year. A Power subscription is priced at $500 per month; $5000 annual pre-paid and comes with a dedicated analyst and premium services such as advanced privacy options and active promotional services.
Overall, we had not run into this type of technology prior to our briefing, and wanted to pass on visibility to our readers. We further garnered the impression that this is an energetic start-up with a mission, passion and purpose as well as a somewhat attractive pricing model.
© Copyright 2016. The Ferrari Consulting and Research Group LLC and the Supply Chain Matters® blog. All rights reserved.
Disclosure: We have no current client of business relationship with Powerlinx or its investors.
It is not that often that one reads about a key supplier that has elected to dismiss a major customer, let alone a customer that has high consumer and industry appeal. Thus the indication published by The Wall Street Journal today reporting that Mobileye, a key supplier of autopilot technology has elected to part ways with Tesla Motors.(Paid subscription required)
According to the report, the supplier will no longer provide its auto pilot computer chips after the current supply agreement ends because of disagreements about how the technology was deployed. The WSJ report points to the recent tragic accident involving a driver in Florida whose Tesla autopilot failed to recognize a turning tractor-trailer vehicle, causing a fatal crash. The supplier indicated to the publication that its current system was not designed to always detect vehicles cutting in-front, and that a new software release scheduled for 2018 would be able to do so. The report quotes Mobileye’s Chief Technology Officer indicating that in a partnership, the supplier needs to be there regarding all aspects on how the technology is being utilized.
According to the report, Israel based Mobileye is a current supplier to more than a dozen separate auto producers and that Tesla sales account for about one percent of its current revenues.
Tesla’s CEO Elon Musk indicated in an email to the WSJ that the split would not affect the company’s plan to develop more advanced versions of its Autopilot system and further indicated that the move was expected. Yesterday, the disclosure by Mobileye pushed its stock into a reported decline of 8 percent at the day’ close.
One could certainly speculate whether this announcement is either directly related to pending litigation or whether the partnership was straining for other reasons related to development timetables. However, it is noteworthy when a supplier takes the bold initiative to walk away from one of the most visible automotive industry companies on a global basis, one that is gearing-up to produce upwards of 500,000 electric powered vehicles in the coming few years.
As noted and observed in our prior and most recent Supply Chain Matters commentaries related to Tesla, it adds yet another challenge on the need to develop and nurture a supplier base that can provide continued leading-edge technology and volume requirements that can match Tesla’s timetables and aggressive product development and deployment needs.
© 2016 The Ferrari Consulting and Research Group and the Supply Chain Matters® blog. All Rights Reserved.