Why it pays to pay on time: The impact of delayed payments on supplier relationships
By Alex Saric, Smart Procurement Expert at Ivalua
COVID-19 has shifted business focus on cost as revenues across most industries have been under severe pressure. In doing so, some procurement arms are alienating suppliers they will need onside during recovery and rebound efforts. It’s time to remember why cost became just one of many success parameters in the supply chain, and to address the full list of what really drives value.
In recent years, the supplier-buyer relationship has diversified dramatically. The rise of globalisation, supplier-led innovation, corporate social responsibility and a whole host of additional considerations meant that the supplier-buyer partnership was founded on more than just price. ‘Value’ was the key term, and it encapsulated the entire proposition as two mutually benefitting members of this union.
However, protectionism has often taken over in pandemic times, causing businesses to safeguard their own bottom lines and cash flow, potentially to the detriment of their ‘other halves’. It has led to a situation where almost two-thirds (65%) of suppliers now feel that late payments are putting their own operations at financial risk.
Delayed payments, and a focus on driving down cost is threatening to adversely affect supplier relationships at a time when a strong supply chain is more critical than ever.
The supplier cost crunch is “beyond reasonable”
Late payments and a blinkered focus on cost have a significant impact. In fact, Ivalua’s recent Supplier Relationships Report found that buyers are forcing suppliers to open or extend lines of credit in 41% of cases.
For more than one-third (34%), the same dynamic has led to a delay of products or services being provided. And among 33% of respondents, there had been a subsequent need to increase prices or reduce discounts, in order to make up for shortfalls. Counteracting demands from their clients, however, has also made 89% of suppliers feel pressured to reduce their costs to a level that is “beyond reasonable”.
To underline the extent of overall delays, only a quarter of suppliers reported that they always received timely payments.
There are no prizes for guessing the main cause over the past year. As many as 30% of suppliers have confirmed that late payments increased due to COVID-19, and double that (60%) have been asked to extend payment terms over the past 12 months. Suppliers are being asked to accept payments later and then not even being paid on time with the extended schedule. The pandemic has added to a perfect storm for businesses. Simultaneously, they are also trying to manage the pace of digital transformation, ensure supply continuity, meet higher customer expectations, drive efficiencies, and meet sustainability targets.
Something had to give. But organisations should be looking to face this new world alongside their long-time partners, instead of chasing short term gains from delayed payments.
Paying the price
It is a dangerous precedent to set. While COVID-19 has stunted cash flow for many, defaulting to late payments or extended payment terms creates a potentially bigger challenge for companies beyond the pandemic.
While suppliers have no doubt felt the pinch during this period, as the economy recovers it is suppliers that will be in demand. We see that already, as firms scramble to be prioritised for supplies ranging from chips to raw materials. And once round the negotiating table, who are they likely to turn to? Those who strived to maintain a strong partnership during the tough times, or those who moved them to the bottom of the priority list?
The implications of a poor supplier relationship go far beyond the initial supply of key services. Poor supplier relationships can adversely impact businesses ability to collaborate on digital transformation, product development, sustainability, responsible sourcing, operational efficiency, transparency and visibility.
In fact, almost six-in-10 (59%) suppliers indicated reduced willingness to share innovations with customers who place them under price pressure. A 2020 study on business collaboration by Forrester Consulting found that the number one factor impacting supplier willingness to collaborate and share innovations was visibility into and timeliness of payments.
A system for reconciliation
While this current trajectory does bring cause for concern, it actually goes against the tide of what analysts, and indeed we, were seeing prior to the pandemic. At least, in terms of intention. A recent Procurement Leaders study on restoring growth found that the most effective procurement strategy to grow revenues was scouting innovation from suppliers.
The above resistance to innovation sharing is a serious concern, as organisational behaviour is working against their most effective strategy. Businesses must understand the implications of their behavior and not assume suppliers will eagerly collaborate simply because of their size or brand.
Instead, organisations must behave in a way that establishes them as customer of choice. This involves setting the right incentives to collaborate, and implementing the right systems and processes to enable effective, efficient collaboration. At present, two-thirds (67%) of suppliers admit to finding buyer procurement systems a challenge to use, which further limits their ability to share innovations and collaborate effectively. They are particularly frustrated when systems impose fees or conditions to usage.
But the efficiency, scalability, visibility and communication benefits (let alone the financial advantages) that derive from selecting a smart system could be the boost that supplier relationships need to rally after a tumultuous year.
Ultimately, to be effective, collaboration capabilities must exist at a platform level, spanning across all processes that touch spend and suppliers, to offer a complete picture of risk and opportunity. In doing so, organisations can collaborate effectively with suppliers on everything from recovery to digital transformation, efficiency, ethics, sustainability and customer satisfaction.