A Look At Payment Ethics And The Cost Of Squeezing Suppliers

Small suppliers, so often at the mercy of larger companies and with little capital, are the worst hit. It is estimated that in most economies, small and medium firms account for more than 95% of all businesses, and between 50% and 60% of gross domestic product. According to European Union statistics, 99% of businesses in the EU are small and medium-sized enterprises employing a combined 75 million people. A squeeze on this group can have disastrous effects on the overall economy.

The global financial meltdown has prompted large companies to further tighten supplier payments to improve their own cash flow. In China, industry sources say a number of US retailers are asking suppliers to increase payment terms from the previously agreed 30- 45 days to 90-120 days after shipping. Suppliers who cannot raise the money to meet extended credit terms are going out of business.

The Forum of Private Business (FPB), which represents 25,000 small and medium- sized enterprises in the UK, found in a survey in August last year, that 72% of businesses state 30 days as standard payment terms, while 9% have 60 days terms and only 8% have 14-day payment terms. But in practice, small businesses receive payments between two and six months, the survey revealed. The odds against suppliers across the world, for example in India, are stacked even higher. In 2006, the country passed a law requiring large companies to pay small suppliers within 45 days. But, according to the Federation of Indian Micro and Small and Medium Industries, most companies still do not pay suppliers within six months.

“We never received your invoice,” is one of the most common excuses. Sometimes it may just mean that the invoice failed to travel from the purchase department to the accounts payable department. Even a trivial error in the invoice can mean no payment. Suppliers do not come to know of this until they follow up. Often companies also impose settlement discounts -a 2% to 3% reduction for paying on time.

In order to ethically deal with supplier payment, the following practices are suggested

• Agree on payment terms at the outset of a deal and stick to them.

• Negotiate terms of payment at the beginning, and comply with them

• Fully explain your process for paying suppliers

• Ensure payment of invoices form the supplier comply with the contract terms or legal requirements.

• Promptly inform suppliers if an invoice questioned, and resolve any dispute speeding.

• Do not force extended terms of payment

• Do not refer to invoice error as justification to delay payment.

So what happens to social and environmental standards in the supply chain when economic times are tough? How will companies demand higher ethical standards from suppliers when they are cutting orders and bargaining harder for lower prices and longer credit terms?

Certainly, there are some companies that are setting examples of fair play. Collaborating to increase productivity in the supply chain presents a major opportunity for brands that want to reduce waste and cut costs in the supplier chain.

Rajesh Bheda, a prominent garment manufacturing consultant and the former department chairman at the National Institute of Fashion Technology in India, says that implementing production systems that focus on the principle of “making the product right the first time” can also save valuable resources -it is common for factories to waste resources repairing a garment several times to meet the quality standards.

Some suppliers often resort to excessive overtime and other cost overruns because of poor production planning. Instead, better planning, which helps suppliers to have realistic production targets, can improve cost efficiency without such negative practices.

The global liquidity crunch is an opportunity for responsible companies to now test their principles of ethical behaviour. By aligning their goals in these difficult times with the goals of their suppliers, they are likely to be better able to handle the stress of economic downturn.

However, companies that try to take advantage of tough times to wrong suppliers risk damaging their reputations and weakening their own supply chain. More ethical rivals, which have the support of trusted suppliers, will be more ready to prosper when the good times finally return.