Following the global financial crisis, the emphasis on money has become a major issue for suppliers and retailers. Whilst the brand will and always should remain sacrosanct, it is vital that all stakeholders become more aware of the role of money and how to affect it, in the supplier-retailer relationship.
Sources of money
Three major sources of money have become increasingly important in delivering measurable improvement in business: Stocks, Debtors and Creditors. In other words, a supplier can improve profitability by managing stock more efficiently, delaying payment to suppliers of packaging, ingredients and services, and by inducing customers to pay earlier…
Given the retailer’s ability to exploit a NAM’s historical tendencies to ‘ignore’ these elements by effectively delegating their day-to-day management to in-house experts, it is no wonder that ‘cash-business’ retailers have been able to make major gains at the expense of suppliers’ working capital… The shortage of liquidity arising from the financial crisis has simply raised the agenda-status of cash-management for both parties.
In fact, this all started in the ‘60s when we delivered in large quantities, once a month, making a 30-day payment period ‘reasonable’. In practice, a 30-day credit period, payable at the end of the month following, really worked out at 45 days. Retailers who have not picked this one up, are already history, or moving that way, and are being acquired by competitors who know better, using supplier’s money…
How free credit grew, and grew…
Obviously good retailing practice encouraged more frequent delivery in smaller quantities, and suppliers were willing to oblige, in the interests of efficiency and customer service… Meanwhile, we left the finance guys back at the ranch ‘minding’ the credit position.
Their brief was to ring alarm bells when a customer exceeded the given credit period… Unfortunately, nobody said anything about negotiating earlier payment with every improvement in delivery frequency…
By totally missing this working-capital trick, most suppliers now find themselves in a position whereby their customers turn stock every two weeks on average (except where deliveries of a given SKU are made daily, or even more frequently…), and receive payment in thirty days. The financial crisis has caused the average payment period to extend to 45 days from time of invoice, resulting in an interest-free loan that must be financed by suppliers in order to maintain the relationship.
Squeezing working capital
The tightening of accounting rules following the build-up to the financial crisis, and the resultant need to increase transparency of trade funding, means there is even more pressure on working capital savings as a way of making money available in the business.
The problem is that the credit period status quo is now established, and any improvement in the current balance of working capital must be negotiated in return for the appropriate cash inducement.
Remembering that the retailer is a cash machine that happens to sell groceries, a financially healthy customer is always capable and willing to pay a supplier sooner, on delivery, or even in advance, provided the financial inducement is appropriate.
Again, history distorts the logic in that, over the years, all parties have been led to believe that any discount less than 2.5% for early payment is derisory… when in fact it can easily be shown that a payment of 0.25% for 5 days earlier payment is quite generous, even at 18% cost of money…
How a buyer’s reduced tenure affects the process
It needs to be borne in mind that buyers are now rotated annually to minimise the influence of the buyer-seller relationships in negotiation. Thus, speaking to a buyer focused on the short-term and measured on gross margin and sales performance will obviously not always be productive. Better to save this discussion for the customer’s finance department, or an even higher level contact within the customer’s business.
A buyer attempting to restrict the dialogue to buyer-seller, has to be persuaded that the NAM represents the supplier’s total offering, the cake will not be made larger, and that if negotiating-access to other departments/functions is prevented, then all ways of remunerating the customer will have to cascade into the margin.
Finance for all stakeholders
However, the real answer is to make every customer-facing team-member familiar with the basic working capital calculations and their job-impact upon working capital performance. In fact, working capital now presents one of the last and most transparent ways to make significant, measurable and recognisable savings within the business, whilst at the same time improving overall effectiveness and efficiency.
After all, money counts, and NAMs’ success depends upon their ability to count and use it properly…..
