No Need For Legislation On Supplier Payments

There was an interesting report last week that the UK government may force firms to reveal supplier-payment terms and average payment times four times a year. The goal is transparency and the proposal is evidently a reaction to some recently reported events, including demands by one food company that suppliers pay an annual fee to continue doing business. The food company recently backed off that demand.

I’m all for transparency and for treating suppliers fairly by not forcing them to wait for long periods of time for payment. But I have to admit, that it’s an area where government shouldn’t be involved. There shouldn’t be any need for legislation in a matter like this.

That may seem like a strange opinion from someone like me who believes, like most progressive CPOs I know do, in treating suppliers as partners. It may seem even stranger since I hail from the US, where there seems to be a tendency to enact legislation on all kinds of things. And indeed, the US has gotten close to similar meddling in buyer-supplier relationships here. Recently, the Obama administration launched an initiative called SupplierPay that encourages large companies to speed up payments to small suppliers. Many large companies have signed up for the initiative, but there is no actual legislation about that, at least yet.

What often gets overlooked is that there are plenty of common-sense reasons for companies to pay their suppliers on time, including the imperative of avoiding supply chain disruption. Yes, extending payments can improve a buying company’s cash flow, and, as at least one CPO has told me, be a strategy for asserting leverage in supplier relationships. But the risk is putting suppliers into the kind of financial difficulty that may prevent them from performing.

Several marketing and PR executives described that risk clearly and succinctly as it pertains to their industry in the trade journal PR Week. In the same article, spokespeople for some of the companies extending payments just as succinctly explained their case, which essentially boiled down to claiming that everyone else was doing it so they had to in order to be competitive.

Perhaps a solution would be more recognition of the value of discounts for early payment. There is technology that enables that, and the result can be improved cash flow for buyer and seller, a better alternative than government involvement.