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17 January 2019
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Paying late doesn’t make good business sense

28 January 2013


News last week that one of the suppliers to a global construction giant had elected not to accept any more work from that source because of delays in getting paid should sound warning bells to over aggressive procurement functions.


Whilst the news may not have told the full story it is clear that there are moves to stretch payment terms and that many of these are beyond what is reasonable under the circumstances.

With major projects there will be layers of subcontracting and it is a fact of life that some of the payment periods can be argued as a natural impact of payment flow down. With cash flow issues being what they are then a third or fourth level contractor may well not be able to expect to be paid in 30 days from invoice, but tales of 200+ days are wholly unacceptable.

Even if we allow for the sub contracted layers to have their own cash flow issues that might preclude paying the next level down before they get their own invoice paid there is no excuse for making the next level wait another month before their payment comes through, let alone several months. Apart from it not being acceptable conduct it just isn’t good business practice.

In any organisation, whether private, public or not for profit you use suppliers because you need to; you don’t do it as a charity, you do it because your organisation needs what they bring to help you meet your own objectives. In the simplest terms, you need them as much as you need your own customers. That is the basic of the supply chain, and if you want to be able to service your customers, in whatever shape or form they come, then you need your supply chain.

A few months ago I was invited to be part of a round table debate on procurement in the FM sector, and one of the questions that was posed was where does the power lie? Well it always lies somewhere, but that fulcrum point is not fixed. Markets fluctuate and sometimes the tipping point will be in a buyer’s market and at other times in a seller’s. That is a fact of life and successful businesses understand when to move before the shift makes them; it’s always better to be ahead of the curve.

In the situation that made the news last week the primary level of the supply chain is a major company that should not have any reason to be holding back on paying. Once the work is commissioned they should be making provisions for payment and once the work has been done and invoiced they have a debt to pay. Putting off that payment does not reduce the debt (it might increase it) so why do it?

As with any form of abuse of power, or bullying, you might get away with it for a while, but sooner or later there will be a backlash.

One of the things about good procurement is in understanding the market and any good negotiator will know not to paint themselves into a corner. Apart from the specific risk of pushing a supplier into insolvency part way through a contracts, to push the market beyond the point that it will accept is a big general risk. Yes there may be suppliers willing to take a chance, but what about the client?

News travels and taking on a supplier that abuses its supply chain is a risk that clients may not want to take.

Pay up promptly; you know it’s the right thing to do.

John Bowen is an FM consultant
http://thatconsultantbloke.wordpress.com/

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