Recent automotive industry study shows that p2p efficiency and supplier performance go hand-in-hand

There is a moment of poignancy in “Too Big To Fail”, a movie that provides a true account of  the 2008 financial meltdown that shook the world. I am referring to the moment when U.S.  Treasury Secretary Henry Paulson receives a call from General Electric’s Chairman of the Board  and CEO Jeffrey Immelt, who tells him that GE is unable to finance its daily operations. At that  polarizing moment in time Paulson realized that the crisis had spread to Main Street. 

Even though GE had a market capitalization in the hundreds of billions of dollars, Immelt  indicated that GE was “having trouble funding their day-to-day operations,” lamenting that  the company’s finance division was “infecting the rest of our business.” 

He then goes on to say that “If we can’t finance our day-to-day operations, every business in  America’s gonna be shutting down.” In the context of today’s post, this underlines the  downstream effect of liquidity and the critical role buyers play in ensuring supply chain  viability. 

The relationship between supplier liquidity and supply chain viability was recently driven  home to me when I read the results of a survey highlighting “Detroit Three scores slide in 

supplier relations.” It was disheartening to see that one of the major reasons for this decline  stems from the “slowness” by which automakers pay suppliers. 

In fact, the data from supplier feedback shows that Chrysler for example had a very low score  in several key areas including: paying invoices on time; paying accurately according to initial  payment terms; resolving payment disputes and time to resolve payment disputes. 

While the study goes on to state the obvious being that “Automakers that maintain positive  relationships with suppliers tend to offer the best products at affordable prices,” the impact  that a slow payment regimen has on suppliers from a liquidity standpoint is significant. 

This latter point was reflected in a discussion I had with the head of a small supplier-side  organization who explained his concerns relative to the significant growth in revenue the  company was experiencing through their increased engagement with a large customer. 

While revenue had increased dramatically so did the challenges it created relative to financing  that growth. In establishing the company’s operating line of credit, their bank would only  consider receivables that were due no longer than 90 days. Anything beyond this point – although there was little risk of the invoice not being paid – was not included in the  calculation. Unfortunately, the client paid their invoices on average around the 100 to 120 day  mark. This meant that the supply company either had to finance the receivables gap  themselves, or forfeit the business. 

This ripple effect should raise a red flag for everyone in finance and beyond. Leaving suppliers  high and dry is both short sighted and self-inflicting. 

New technologies and non-bank supply chain financing options make it possible for smarter  buyer organizations to step up to the plate with innovative solutions that maintain supply  chain liquidity and healthy supplier relationships. 

You can learn more about these new developments in a webinar with Trade Financing Matters  guru David Gustin Wednesday, May 21, 2014 1:00 PM EDT – click here to register.