While the roster of companies signing up for SupplierPay initiative has certainly grown, Obama’s program has limited substantial results to show for itself.
In 2008, multinational beer giant InBev acquired one of the largest American brewers, Anheuser-Busch, to create the world’s largest beer company. InBev is an affiliate of 3G Capital, a conglomerate that also owns food and beverage staples like Heinz and Kraft Foods.
In the wake of the Anheuser-Busch and InBev merger, 3G Capital began requesting that its suppliers give it up to 120 days to make payments, rather than the standard 30. Not in a position to refuse, the much smaller farmers and manufacturers that supply 3G Capital companies reluctantly complied.
The extended payment arrangements marked a paradigm shift in supply chain economics. The practice soon caught on almost everywhere, giving big companies breathing room in the aftermath of the 2008 financial crisis. But it led to cashflow problems for the small, captive suppliers with little financial cushion, and the tactic still affects them today. Irked at being treated like lenders instead of suppliers, the UK’s Marketing Agencies Association encouraged advertising agencies to strike against Anheuser-Busch InBev.
In response to the increasingly unfair terms imposed by companies, the Obama administration launched the SupplierPay initiative in 2011. The primary function of the initiative is that companies pledge to pay their suppliers earlier, unclogging capital flows and helping small businesses.
While the roster of companies signing up for SupplierPay has certainly lengthened since launched (growing from 26 in 2014 to 47 in 2015), the program has limited results to show for itself. We examined the days payable outstanding (DPO) of 17 of the first 26 pledged companies, we found that more than half of those companies have actually extended their overall payment days, to a median of +1.9 days.
Here are five reasons why Obama’s SupplierPay initiative is not the answer:
- No enforcement
Perhaps the single biggest flaw with SupplierPay is the fact that there is no enforcement for companies that have pledged to pay suppliers faster. David Gustin, the founder of Trade Financing Matters, writes, “the White House has no teeth in their proposal.”
“Getting companies to volunteer and pledge without mandating change via regulations (like Brazil or Mexico have mandated electronic initiatives around trade flows) is just a tough road to travel,” Gustin explains in a blog post.
As a result, the average payment time for pledged companies has actually increased, not decreased.
- The Prisoner’s Dilemma Paradox
A report from the US Department of Commerce explains a fundamental disincentive for companies to pledge. The Prisoner’s Dilemma is a hypothetical scenario that explains why two rational entities might not cooperate even if it is in both their best interests to do so.
If two firms pay their suppliers quickly, they receive the same adequate compensation. However, if Firm A decides to delay payment in order to invest the savings or finance short-term projects, it can benefit from higher compensation. Firm B is put at a competitive disadvantage and might even have to absorb the costs of Firm A’s delay. Firm B now wants the same benefits as Firm A, so it decides to delay payment as well. Now the supplier is being squeezed by both firms, resulting in shoddy goods, unstable output, and/or higher prices. In effect, everybody loses.
Even if SupplierPay means well, it accomplishes little unless everyone participates and pays earlier, not just pledged companies.
- Cost is passed back to suppliers
Because most of the pledged companies are large corporates, they can leverage their huge buying power to force the added costs resulting from earlier payments back onto suppliers. In addition, those with extended payment terms are typically non-strategic suppliers and therefore, are are not the suppliers that are high up on a large buyer’s priority list. A farmer might only sell his or her barley product to a single brewer, for instance, so that brewer can dictate the terms. If a corporation can no longer gain an edge from extended payments, then it can force captive suppliers into discounting their products instead.
- Ineffective without Supply Chain Finance
Supply Chain Finance (SCF) needs to be more widely available to both the suppliers and the buyers. Dynamic discounting solutions, virtual cards, and working capital platforms can all help suppliers get paid faster. Innovative SCF solutions can help companies extend their payment terms in a way that’s fair to both parties. However, SupplierPay does little to encourage more supply chain finance solutions. In fact, it fails to acknowledge the economics for large buyers to offer such options without tying their availability to an extension of payment terms.
- Paper checks are slow
In addition to more supply chain finance options, experts agree that upgrading to more efficient payment methods can also reduce the strain on suppliers. Simply switching to electronic payments instead of sending checks and invoices through the mail could go a long way toward alleviating unnecessarily long payment periods.
Despite the significant cost savings of moving from paper checks to e-payment, a recent report suggests B2B checks will not go away. Some 70 percent of organizations it surveyed are struggling to convert to electronic payments, and most companies cite customer/supplier hesitance to adopt and IT barriers as the top obstacles.
Yes, we are in an election year. So the question is: is SupplierPay 2.0 in the cards? Given the lackluster results thus far and notwithstanding who wins the White House later this year, my money is on a radical change in the current initiative. If the new administration does double down to have any impact, it will require direct intervention such as regulations, tax incentives, and repatriation credit. I am much more optimistic about the technology innovation happening in SCF to help small businesses. Such innovations from digitization of invoices to cloud solutions to new ways to optimize working capital to new alternative forms of B2B financing, collectively will have a far more substantive impact to the entire supply chain ecosystem.