Unlocking the Potential of Supply Chain Working Capital Finance

Original Post Source

Too often, working capital pressures roll over supplier relationships without regard for what happens to supply chain risk. But now that new supply chain financing tools and techniques are proliferating, companies have a fresh chance to implement a coherent business strategy that balances the legitimate concerns of the buyer’s finance department with those of the company’s supply chain management experts.

By Ryan Fernandes and Lisa M. Ellram

Ryan Fernandes is a financial services professional experienced in supply chain finance based in Melbourne, Australia. He can be reached at mr.ryan. .(JavaScript must be enabled to view this email address). Lisa M. Ellram, Ph.D. is the Rees Distinguished Professor of Supply Chain Management at Miami University. She can be reached at .(JavaScript must be enabled to view this email address).
May 5, 2017

It must have been a huge shock for suppliers. During the heart of the recession in January 2009, beverage giant Anheuser-Busch InBev extended its payment terms from 30 days to 120 days with less than a month’s notice, giving suppliers no time to prepare.

We don’t know exactly how the suppliers responded, but looking at Anheuser-Busch InBev’s financial statements, we know that its trade accounts and other deferred expenses payable went from $4.833 billion to $5.657 billion between 2008 and 2009. That freed up $824 million in working capital for the company. Assuming that it was InBev’s smaller, less powerful suppliers that collectively lost that working capital, they probably also incurred financing costs of around $123 million, all told.*

Around the same time, global beverage giant Diageo went from 30 days to 60 days payment, with no warning or offsetting compensation for its suppliers. Many other large companies, including Johnson & Johnson and Tesco, used the global financial crisis as a rationale for extending terms—even on previously negotiated contracts—and for aggressively monitoring collections from their debtors.

It must have been a huge shock for suppliers. During the heart of the recession in January 2009, beverage giant Anheuser-Busch InBev extended its payment terms from 30 days to 120 days with less than a month’s notice, giving suppliers no time to prepare.

We don’t know exactly how the suppliers responded, but looking at Anheuser-Busch InBev’s financial statements, we know that its trade accounts and other deferred expenses payable went from $4.833 billion to $5.657 billion between 2008 and 2009. That freed up $824 million in working capital for the company. Assuming that it was InBev’s smaller, less powerful suppliers that collectively lost that working capital, they probably also incurred financing costs of around $123 million, all told.*

Around the same time, global beverage giant Diageo went from 30 days to 60 days payment, with no warning or offsetting compensation for its suppliers. Many other large companies, including Johnson & Johnson and Tesco, used the global financial crisis as a rationale for extending terms—even on previously negotiated contracts—and for aggressively monitoring collections from their debtors.

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