Late supplier payments lead to low performance, higher costs
- Supplier payment remains a challenge for businesses, with slow internal processes and insufficient automation presenting the largest obstacles to payment efficiency, according to new research by Tungsten Network and the Institute of Finance and Management (IOFM).
- The Friction Index — Tungsten and IOFM's tool that assesses resistance found in business processes — revealed that 47 percent of companies surveyed confess that one in 10 payments go out late, 16 percent admit that one fifth of their payments are never on time, while only five percent of businesses can assert they always pay on time. One in 12 do not monitor their payment processes at all.
- In addition to slow processes and lack of automation, the Index reveals that administrative errors, capacity to manage the sales volume and cash flow management are also top issues that prevent efficient payment to terms.
Late payments to suppliers are disrespectful. They show contempt to the supplier, their employees, and also to the buyers working with them. Except for extenuating circumstances, there should be no late payments to suppliers.
Late payments, no matter the internal or external cause, is a primary cause for poor supplier performance, deteriorating relationships, creating higher prices by a built in penalty. Late payments are the under-identified scourge of the supply chain, causing more disruptions than any other identified risk.
Cash flow is at the heart of any business, and disruptions in cash flow interrupt the flow of materials throughout the supply chain. The causes of late payments, including slow internal processes, lack of automation, administrative errors, capacity to manage volume, and cash flow management, are merely excuses for poor performance. We do not tolerate these kinds of excuses when dealing with supplier performance issues, and our suppliers should not have to work around performance issues from their customers.
Do you want to have good suppliers? Be a good customer.
I have seen many supplier payment issues over a long-term supply management career. As a rookie manager, it was my responsibility to match supplier payments with incoming daily receipts. That is after the owner’s credit cards were paid. The accounts payable aging report was more important than the production schedule.
And then there was the Fortune 500 company I worked for, who committed to prompt payment terms and then paid the supplier 60 days later, with a derisive comment about having suppliers "live with it if they want to do business with us." We churned through many suppliers, but the stock price was healthy.
But I also worked for companies where prompt payment was as a tool to increase supplier performance and win negotiations. While the research may indicate that half of businesses admit to paying suppliers late, perhaps it is underreported. Paying suppliers on time and to terms is a differentiator in business and quite easy to leverage. Suppliers, especially those in small and mid sized businesses, are intimate with their cash flow needs. When two customers call to expedite an order, the one who will pay quickly will usually get the service they need. I did.
The accounts payable process is an important part of the supply chain management process. Sensitizing that organization as to the importance of prompt payment, or at least meeting payment obligations, is critical. A delay in payments, or even worse, antipathy towards suppliers, is patently wrong. These are not faceless corporations with a 12-digit account number, but companies made of families with cash flow needs of their own.
What if your next paycheck was delayed because the payroll organization is backed-up, or protecting cash flow? The uproar would begin immediately! Now put yourself in your supplier’s shoes and consider the ramifications of all of their stakeholders depending on those payments.
Pay suppliers on time. It’s really the right thing to do.