Payments » Supplier negotiation doesn’t have to be a zero-sum game

Supplier negotiation doesn’t have to be a zero-sum game

Andrew Watson, Global Head of Working Capital Solutions at Optal discusses best practice for encouraging early payment or at best on-time payment.

What kind of supply-chain partner are you? If you work mainly on the buy-side, you might feel pressure to win at all costs. If that means taking a tough line, maybe even at the expense of crushing your rival, so be it.

Supplier negotiation doesn’t have to be a zero-sum game
Andrew Watson, Global Head of Working Capital Solutions, Optal

That’s certainly how some retailers saw the art of the deal. In 2016 the grocery market watchdog ordered Tesco to make “significant changes” after finding it had deliberately delayed payments to suppliers to boost its profits. A couple of years later, the Co-Op was investigated for delisting products with little or no notice and for landing suppliers with new, questionable charges.

However, there’s ample evidence that retailers are embracing a different approach. Dave Lewis, the outgoing, much-lauded group CEO at Tesco, identified much-improved supplier relationships as one of his greatest achievements. Lidl recently committed £15bn to providing suppliers with “the support and ability needed to invest and grow”.

Why the change in approach?  In an industry known for combative procurement negotiations, relationships have thawed – even warmed. It’s driven, at least in part, by a growing understanding that mutual support equals joint success. Put differently, in a good negotiation, all sides win.

Achieving a win-win outcome is rare in business. For most, it’s a game of winners and losers; survival of the fittest; sharp elbows not soft skills. In low-margin industries like FMCG where every penny counts, this is especially true. And yet, it’s exactly these industries which are embracing empathy, building relationships and striving for that win-win outcome. Why?

For a start, the supply chain is a delicate ecosystem. Just like a worn cog can cause a large machine to break down, the failure of a small but strategically important supplier can bring a halt to the global movement of goods, leading to empty shelves or faulty goods. The supply chain must remain solvent, the agreements binding it sustainable.

Squeeze the supply chain too hard, goes the thinking, and the loser might just be you.

Picture a family in a toy shop. The child picks up two plush teddy bears. One has been produced by a team of suppliers operating under the tightest of margins. They have cut costs accordingly, filling their toy with a hundred grams less stuffing. The child picks the toy with the better ‘cuddle-factor’, rewarding the licensee who kept their nerve – and the supply chain’s margin – intact.

There’s another good reason to invest in the relationship. Ever wonder why you aren’t offered the same price as the competition? Suppliers, like Father Christmas, have a naughty list. Persistent late payment is priced into many bids and will factor in negotiation fall-back positions.

That’s exactly why we need tough tactics, many buyers argue. Reward suppliers, and investor demands for increased profit risk going unanswered. If heads are going to roll, they say, better they roll elsewhere in the supply chain.

Good point. Back to the win-win.

What if there was a way to negotiate a discount which still left the supplier happy? What if you could match or extend your previous Days Payable Outstanding (DPO) while nurturing, not needling, the relationship?

Paying suppliers early isn’t as crazy as it sounds

Here’s an idea. Offer your supplier a choice: they can either stick with the status quo which sees them paid, say, 45 days after shipping. Or they can offer you a discount on the contract and, in return, be paid within in a week.

This is attractive to many suppliers, especially in markets with above average interest rates. One of our clients with manufacturing partners across India, Thailand and China announced such an offer at its annual supply chain conference. 70% of its partners had signed up to the early payment discount by the end of the day.

Some of you reading this might think it’s not that simple. That there are other, non-negotiable, bills that place huge strain on working capital. The kind of pressure which makes this supplier-friendly agenda unrealistic. To pay suppliers with kind of speed you’d need access to cheap, flexible credit. The kind of credit that doesn’t exist.

And you’d be right in thinking the answer isn’t to be found in trade or supply chain finance. Most companies are either ineligible or have already exhausted this credit. Besides which, the extended payment terms imposed by the banks create the supply chain tension we’re trying to avoid.

Instead, consider an innovative form of under-utilised credit: the humble corporate card. Or, rather, the dozens or hundreds which already exist across your organisation.

I know what you’re thinking: it’s a non-starter. Many suppliers don’t accept card payments because of the cost and admin burden. When dealing with wafer-thin margins it’s hard for them to justify the time it takes to sign a contract with acquirers, replicate invoice data and maintain compliance (not to mention the terminal rental fee).

That’s why there are new innovative platforms that have been developed that enable organisations to take unused credit across all active cards and have it pooled into a central, regulated fund, administered via electronic bank transfer. You can then choose to use this credit facility to pay suppliers much more quickly than before. The supplier doesn’t need to become ‘card capable’. The two parties simply agree a fee for early settlement and include it as a line on the invoice.

The repayment to the bank can typically be deferred just as long as your existing DPO terms, so you shouldn’t be left out of pocket. In fact, if you can negotiate a discount which exceeds the low cost of credit – as little as 1.1% – you’ll even make a cashable saving, while also offering your supplier a reduction in Days Sales Outstanding (DSO).

Making capital work harder

Improved relationships with suppliers isn’t the only benefit of a platform like ours. One of the greatest strains placed on any business is having to pay regular, high value payments to creditors that aren’t prepared to negotiate on amount or due date.

Her Majesty’s Government is an obvious example, and in the retail industry commercial landlords and utilities companies are hard to ignore. It’s hard to run a business when someone turns the lights off or turfs you onto the street!

Company card credit allows businesses to manage the impact of these payments on working capital. As debt option goes, it’s cheap and flexible – letting finance chiefs squeeze every last day of interest-free credit from individual cards. And by masking the true source of funds and paying via bank transfer, they also avoid any credit card surcharge payable to the likes of HMRC.

Most businesses want to be good corporate citizens. They want to treat partners with respect and nurture the supply chain. At the same time, they are faced with regular, high value, right-on-time payments that impact their ability to pay bills within a reasonable timeframe.

Card credit is an under-utilised resource which, used well, can offer the flexibility needed to resolve that working capital conundrum.

Andrew Watson is Global Head of Working Capital Solutions at Optal.

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