Suppliers must act smart when it comes to dealing with big players. A damaging disparity in bargaining power was suggested this year, when suppliers to drinks giant Diageo were told in no uncertain terms that it was expanding payment terms from 60 to 90 days, principally so that Diageo could “improve cash flow and drive out costs”.
Following it being forced to stage a u-turn in reverting back to 60-day terms, we must ask: does the small supplier have more power than it is led to believe? After all Diageo – with its global reach – requires a smooth supply chain so that it can cater for its customers effectively, perhaps a fact that many undervalue. Understandably and perhaps not unreasonably, empathy most often lies with the small player. After all, could a 30-day delay in receiving payment from its main, or even sole, client result in a small firm having to close down entirely?
Since the financial crisis of 2008, credit control teams have been “streamlined” across the board alongside huge reductions in the usage of external practitioners.
These smaller teams often undertake the same workload as the credit control teams did pre-credit crunch – inevitably impacting on the pace of debt recovery and credit control, explaining to some extent the reasoning behind the payment terms increase by Diageo.
This is unfortunate, however, Diageo was perhaps naïve to underestimate the emotive response the letter would evoke. There is also the possibility that Diageo is underestimating the amount it relies on key suppliers. A breakdown in the supply chain means that the customer suffers, at least in the short term, through increased prices or reduced supply (often both). However, the backlash will have a negative impact on all parties involved.
Suppliers have the ability to make or break larger organisations. Take Zavvi, for example. It was only a year or so after the management team bought out Virgin Megastores from the Virgin Group that Zavvi collapsed due to its main stock supplier’s own insolvency (the supplier was part of the Woolworths Group). With the Forum of Private Business (FPB) claiming such behaviour “threatens to break the backbone of the British economy” and politicians warning Diageo could be removed from the Government’s Prompt Payment Code, it staged a u-turn on its policy.
However, suppliers should not bleat about being ridden roughshod. There is much they can do to counteract a potentially unhealthy and unbalanced relationship.
Firstly, winning a large contract with the likes of Diageo can lead to the business equivalent of a rush of blood to the head – a contract that leaves the supplier susceptible to sudden changes of terms. Always be clear that if you are accepting lengthy credit terms that your business model can sustain this.
Secondly, push back. If you are confident of your product – or equally, if you are worried at the impact a long credit will have on cash flow – you have to argue the case with your client. And have a foolproof back-up plan. With improved business structuring and more effective accounting and credit control, a business can better prepare for how it deals with a sudden change in operating conditions.
Finally, incorporating a crisis plan can reduce stress and anxiety should trading conditions get to the stage of it no longer being viable to operate.
As long as SMEs that deal primarily with one large client utilise services and talent to provide a more equal footing with the industry giants and continue to be supported by the likes of FPB, politicians and the press – these businesses should strive to maintain a balance, rather than succumb to the will of the “most powerful”.
• Steven Jansch is Head of Insolvency at Gilson Gray LLP.
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