Financial hardships caused by the coronavirus pandemic are forcing companies across all industries to reassess payment terms with their suppliers. Some forward-thinking companies have made changes to the benefit of suppliers, serving as leaders for others in their industry.
Across all sectors and all regions of the world, several companies in recent weeks have announced reduced payment terms for some of their suppliers and/or that they’re making immediate payments for outstanding invoices to help keep their smaller suppliers afloat during the pandemic. Consider the following examples:
Consumer goods industry. Consumer goods manufacturer Unilever, for example, announced a wide-ranging set of measures to support global and national efforts to tackle the coronavirus pandemic, including offering €500 million (U.S. $540 million) of cash flow relief “to support livelihoods across its extended value chain through early payment for our most vulnerable small and medium sized suppliers, to help them with financial liquidity; and extending credit to selected small-scale retail customers whose business relies on Unilever, to help them manage and protect jobs.”
Natural resources industry. Australia-based mining company BHP (formerly known as BHP Billiton) similarly announced a handful of initiatives it’s taking, including reduced payment terms for “small, local and Indigenous businesses as part of a program to support its communities and regional economies during the COVID-19 pandemic.” BHP, which spends about $1.5 billion annually with local Australian suppliers, defines a small business as generating less than $10 million in revenue.
BHP said it’s also making “immediate payments of outstanding invoices,” delivering “approximately $100 million more quickly into the hands of our small business partners.” Payment terms have been reduced to seven days (from 30 days) for more than 1,100 small Australian businesses.
“Our local and small business partners play a critical role in supporting our operations and our people, and we know this is a very difficult time for them,” said BHP CEO Mike Henry. “We must look out for each other as we manage through this together.”
Metals and mining company Vale, based in Brazil, similarly announced a series of initiatives to help support its suppliers, including advanced payments to small- and medium-sized companies in Brazil, “even before the invoices are due for services already performed and materials delivered.” Through this action, over R$ 160 million (U.S. $28 million) will be disbursed and will benefit more than 1,000 suppliers from all over the country.
Defense industry. On April 23, global aerospace and defense technology company L3Harris Technologies announced it has begun accelerated payments of more than $100 million to small business suppliers in 45 states that are part of its global supply chain. “Bringing these payments forward gives us assurance in keeping the supply chain stable and supporting our sub-tier vendors, staff, and families,” said Evan Cramer, chief executive officer at Custom Aerospace Machine, an L3Harris supplier.
Food retail industry. U.K.-based supermarket chain Morrisons announced it is making “immediate payments” to its farmers, local food makers, and many more of its small supplier businesses to help them during the ongoing pandemic. “The faster payments will support their cashflow during a difficult time for the British economy,” the company said.
Morrisons said it also temporarily reclassified smaller suppliers as those that provide up to £1 million (U.S. $1.2 million) of turnover a year with the company, up from £100,000 (U.S. $123,000), so that an extra 1,000 small food suppliers will qualify for these new payment terms, including local food and farmers that deal directly with Morrisons. Morrisons said it expects temporary payment terms to last until the end of May before being reviewed.
Following Morrisons’ announcement, supermarket chain Tesco announced on April 23 that it has shortened its suppliers’ payment terms from 14 days to five days. Tesco said it expects this change to remain in place for three months.
In another example, Canada-based food retail supplier Empire Company announced that, as of March 31, it is helping its 13,000 smaller suppliers across Canada “by shortening our usual payment terms, automatically paying all of our small suppliers within 14 days without exception.” This includes local farmers and fisheries, waste collection companies, repair and maintenance businesses, and many others.
Footwear and clothing retail industry. In March, retail chain Woolworths Group announced it has temporarily changed its payment policy to pay small suppliers faster for their goods and services. “We recognize that right now many of our small supplier partners are facing additional challenges in the current climate and we want to do our bit to further help them out by shortening payment terms across the Group,” said Chief Financial Officer Stephen Harrison. The company said the change will positively impact more than 1,100 small suppliers.
In another example, apparel and footwear company VF Corporation (VF) announced on April 16 it will “honor the quantity and price of goods for purchase orders with a factory release date before June 1.” VF said it has asked its suppliers “to pause work on any open purchase order with a release date on or after June 1.” Additionally, VF, however, said it has asked its suppliers with paused orders (those for release after June 1) “to provide details of their liabilities resulting from ordered raw materials and work completed in relation to these open purchase orders.”
VF added that, in some cases, it’s delaying shipment dates “to manage the flow of goods into the destination country. When shipment must be delayed, we engage with our suppliers to determine if the shipment delay will create a cashflow challenge for our supplier, and if so, VF will work with the supplier to support their financial needs through a variety of potential solutions.”
“We believe these steps demonstrate our commitment to maintaining strong working relationships with our suppliers and our shared interest in maintaining open channels for ongoing dialogue and discussion,” VF said. “At the same time, we are working with our peers across the apparel and footwear industry, as well as with multi-stakeholder organizations to identify additional opportunities to support apparel factory workers during these uncertain times.”
The examples mentioned above are the exception, however, not the norm. According to the Turkish Clothing Manufacturers’ Association Board (TGSD), several hundreds of suppliers in the ready-made garment industry have expressed numerous concerns about the recent actions taken by global brands and retailers, including:
- Halting future orders until further notice, which “will oblige manufacturers to cover labor and overhead costs on their own for an indeterminate period of time;”
- Suspending production in the pipeline;
- Soliciting discounts or cancellations for goods that already are in the pipeline; and
- Requesting an extension on the payment terms for shipped goods that are on their way to distribution centers or already in the stores.
“A halt in high-volume production at the beginning of the season means that large quantity orders are creating massive inventories for the factories,” the TGSD said. “Along with the inventory cost, manufacturers bear full liability for materials nominated by brands on their own, which constitutes an existential threat to companies most of which operate within one-digit margins. If brands do not help their suppliers finance the minimum liabilities, suppliers will not be able pay their employees’ salaries and secure their livelihood.”
“This crisis presents an opportunity for retail businesses and manufacturers to reinforce their dialogue and continue to communicate with mutual respect and understanding to maintain a healthy and sustainable supply chain,” the TGSD said.
For multinational companies across all industries in all regions of the world, now is as critical a time as any to reassess payment terms being forced upon the supply base and whether it makes more sense to readjust those terms, at least for the time being.