By – Preeti Ogale
(Ecosystem Manager | Digitate)
With the increasing financial pressure on businesses all over the globe due to the Covid-19 situation, Procurement too is undergoing substantial turbulence. To cater to the existing demand, vendors are facing numerous challenges in the production and delivery of goods and services on time. Buyers on the other hand are facing an acute shortage of working capital, making it challenging for them to honor existing payment terms, which were agreed upon during a non-COVID era.
There is an imminent need for organizations to re-negotiate payment terms with their vendors to conserve working capital. These negotiations ought to be guided by specific insights on the organization’s exposure to specific payment terms and related vendor agreements. Due care should be taken that any adjustments to payment terms are reasonable for affected suppliers, to avoid any push backs or escalations. It is important to make suppliers aware of the implications, that the payment terms relaxation will bring some flexibility into the organizations which are facing cash crunch given the pandemic.
Some businesses by nature are cash rich i.e. the realization from revenue is quicker than payments are due to the supplier partners for e.g. Retail. Whereas, an industry such as iron and steel industry have high cash requirement considering the time taken to convert raw material to a finished product to eventual realization into cash from sales. Each business has its cash need worked out based upon its cash conversion cycle with some buffer. When COVID hit businesses, it sent the normal business cycle into a tizzy. The inventory that would have been sold and converted into cash, was still sitting with the business as sales came to a grinding halt; payment for the inventory was due with no cash to pay.
To illustrate, let’s consider a retailer who buys a shirt from a manufacturer for $50 with a 45 day payment term. He usually would sell the shirt for $100 within the 45 days and pay the manufacturer his $50 + other expenses at his store. However with COVID, his store is closed and he is stuck with the inventory with no cash to pay. This would necessitate an extension of payment terms already agreed with the manufacturer to provide more time for the store to open and cash to be available from sales to pay back or to make temporary working capital arrangement from financial institutions.
In a report from Forbes which covers the impact of COVID-19 on supply chain in retailers in the US, Jeremy Cai of Italic who works closely with both international and US-based manufacturers said, “Many brands are asking for deferred or flexible payment terms, while we’ve heard from other manufacturers that clients across the board have significantly downsized or altogether dropped orders that were previously placed.”
Mckinsey’s report on Supply-chain recovery in COVID times also suggests a crucial point. It states “Supply-chain leaders should analyze the root causes of suppliers’ non-essential purchases, mitigating them through adherence to consumption-based stock and manufacturing models and through negotiations of supplier contracts to seek more favorable terms.”
That brings us to the questions – how to identify these vendors? Which payment terms to target for re-negotiations?
ignioTM Cognitive Procurement brings you insights that can guide you through this delicate process. A detailed analysis of spend along with payment terms reveals specific payment terms that are draining the working capital. Furthermore, this also reveals the vendors who are benefiting the most from them and could be shortlisted for re-negotiations. A comparative analysis of expenditure by vendors, before and during the COVID crisis, reveals vendors who have weathered the crisis better than others. This insight can be used to further shortlist vendors for payment term re-negotiations. The data can be loaded into the software through a single point of ingestion which gives multiple insights and analytics.
The initial steps to negotiate on the payment terms is be to carefully study the contract terms and then have a discussion with the supplier and agree to revisit the payment terms. For new or existing contract renewals – all the agreements during the COVID crisis are required to be reviewed. Negotiations could also be done in case the organization has global data, payment terms can be compared globally between sister companies to get the best out of the payment terms. For instance, a company in US is at 75 days Payment Term (PT) but its counterpart in Europe is at 120 Days.
Due to the effect of the pandemic, it is going to get tough for organizations to recover from the losses and gain momentum in the businesses. As a result the contractual level negotiations will play a key role in the future where the payment terms are concerned and will be modified as per requirement.
With careful analysis and renegotiation of payment terms, organizations can plan well and ensure substantial conservation of working capital through financial risk mitigation. Timely discussions with the vendor on the payment terms will help maintain healthy working relationships.
It is imperative for organizations to act now and act quick. Delays in undertaking such measures can be a major setback for them financially and otherwise. They can leverage ignio Cognitive Procurement at their enterprise to identify and shortlist vendors with preferential terms. With ignio enterprises can restore their supply chains and resume business as usual sooner while the world tackles the COVID crisis.