This is about a large multinational company, supplying parts for many sectors of industry. About 4 years ago they announced internally that all their suppliers would be paid in 90 days, and no interest/penalties would be paid. In practice this 90 days was more like 100 because of processing delays. Exceptions could be made to reduce this to 30 or 60 days if several people up the chain of command could certify that an exception was unavoidable. This made life pretty unpleasant for the company’s purchasing managers, and of course for small suppliers.
This year the policy was switched to 120 days, and all existing exceptions were thrown out.
This company is publicly listed and is profitable. Is this a trend in industry now? Or are they just trying to impress Wall Street?
Ahh, “extending payment terms”. Holding onto cash longer allows the company to invest or use that money in other ways before it has to pay its bills. By delaying payments, a company can show more cash on its balance sheet, which can make its financial metrics look better in the short term. This can be appealing to investors and analysts, if annoying to suppliers and hard on smaller suppliers that don’t have the cash reserves to cover their own expenses while they wait for payment.
I mean, all businesses will try to obtain terms that are as favorable as possible. Are you seeing something specifically unethical here?
If they are being dishonest about it I guess that’s a problem, if they are violating agreed terms of payment but only to a point where if they eventually pay it’s not worth their suppliers suing them. But if they are honest about the fact that this is the way they want to operate, it’s a free market, and suppliers can decide whether to do business with them or not.
I’ve had a few large customers do that. I’ll get a form letter explaining that they’re going to start paying in 60 or 90 days regardless of any previously agreed upon terms. You can either accept it or stop selling to them. The times it’s happened, the customer is orders upon orders of magnitude larger than us and there’s so much competition that if I stopped selling to them today, they would just order from somewhere else without missing a beat.
I’ve had plenty of customers pull that BS. Those ones I have no problem walking away from. It’s just always something. And, whether it’s just an excuse not to pay or an excuse because they don’t have the money or just how their inner bureaucracy works is irrelevant to me. At some point it’s not worth my time to have to make a dozen calls about each invoice.
I have a handful of customers in my system with a notes that remind me to get the payment or a credit card number upfront.
I’ve seen (in my former life as a consultant) terms like NET60, but a 2% discount if you pay NET30 (NETXX just meaning, “pay in XX days”). NET90 would have been excessive even if it was not unilaterally imposed.
Where I saw it was in the context of just-in-time supply chains where the idea was that within 60 days you should have the cash from selling the end-product that you can use to pay back your suppliers. It’s basically your supplier loaning you short term operating capital that you would otherwise have to borrow.
Ten years ago I worked for a big company where we were told don’t even think about telling our suppliers they’d get paid in a reasonable time. It’s all about the power imbalance. We were a big enough customer that our suppliers had to eat the delay.
We were unethical in lots of other ways also.
Yep, many years ago when I worked for a company that supplied non-production items to the Big 3 auto companies, they all did that to us. As Dorjan points out, holding on to their money as long as they can financially benefits them, and they were so large compared to us, it’s not like we could do anything about it.
Yup. Small companies are just at the mercy of the huge ones. Government entities are also notorious for this, but if you decide not to sell to them, you’re giving up a huge potential revenue stream. If you do a lot of business with them and you can bite the bullet for the first round or two, it gets easier to carry them, if not less unfair.
The killer here is when you’re a supplier who’s small enough for the big guys to push around and not also not big enough to do it to your own suppliers.
I’m still struggling to see why you see it as “unethical” if (as you say) there is a clear understanding that those are the terms of business. When you pay for something is a negotiable part of doing business, just like anything else in a free market economy. Why is it any different from trying to negotiate as a low a price as possible from your suppliers?
I do think it’s unethical if a large company violates an agreement in a manner that’s designed to exploit the fact that its not practical for a smaller company to sue them.
“These are our terms, take them or leave them” is not exactly a negotiation. Further, if you do take those terms and do business for awhile and find out that well, the real terms are much worse than the stated terms, what now? Or in the alternative, you take the terms, they abide by them as stated, then 12 months later they announce “these are the new revised less favorable terms” what now?
To my mind ethical behavior requires that you would be willing to take either side of the deal. If the big company would not accept these payment terms from their customers then it is by definition unethical for them to demand them from their suppliers.
It’s ethical in the same way it’s ethical when a landlord says “We’re raising your rent next month. Either pay an extra $100/mo or we’ll allow you to break your lease and move out and the end of this month”.
It might be legal or even ‘normal’, but it doesn’t make it ethical.
ETA, this would be in reference to a customer unilaterally changing the payment terms (normally set by the vendor) after the relationship had already been established.
Not sure why you also quoted me there. I did not use the term ‘unethical’, I simply stated a fact from my own experience, that since the auto companies were an 800lb. gorilla compared to us, we had to accept it. It may be a perfectly ‘ethical’ practice, but it’s tough on a relatively small business trying to keep a positive cash flow. And, they would sometimes change the terms, with little warning, extending the payment time from 60 to 90 days, or 90 to 120, or whatever it was, don’t remember exactly.
This is a weird perspective. That’s just not how a free market economy works. There are no abstract “fair” terms. Everyone from the consumer on down tries to get the most favorable terms they can, and that creates constant pressure to produce things more cheaply and efficiently, that drives innovation and increases in productivity.
Not really so simple, which is why there is, at times strongly debated, antitrust law, consumer protection, as well as securities regulation, tax law, etc.
Sure, but then make a coherent argument against the fundamental principle of a free market economy, don’t pick one tiny aspect of the way it operates that’s no different from any other part of it and say that in particular is “unethical”. The essence of a free market economy is that everyone tries to obtain the most favorable economic terms possible.
Of course, a free market is not free unless it is regulated to ensure fair competition. If the “large companies” mentioned in this thread are monopolies, that’s another matter. But monopolies usually try to gouge their customers, not their suppliers. There’s no point in any company demanding terms of business from their suppliers that force all their suppliers out of business.