There was a very interesting article in the Financial Times this week that highlighted how companies are delaying payments to suppliers, while trying to get paid faster themselves, in response to the weak economy (“Tactics that deliver in a ‘war for cash’“-registration required). The article correctly points out that while this tactic may improve working capital, it could have damaging effects on the supply chain (e.g. put small suppliers out of business).
Alas, the first of my predictions for 2009-that many companies will “panic” and do things that might benefit them in the short term, but could potentially hurt them down the road-is coming true.
Remember all that talk about “supply chain collaboration” and how competition is now between supply chains, not individual companies? Well, it seems like these concepts apply only during good times; when things get rough, it’s every company for itself!
Robert Handfield, professor of supply chain management at North Carolina State University, says in the FT article: “Suppliers have a very long memory. When [the economic downturn] ends they will remember who was around to help them in difficult times.” This has certainly been true in the trucking industry.
For example, I remember talking to many shippers after Hurricane Katrina. Many of them struggled to get capacity in the region for several weeks after the hurricane because many carriers shifted capacity from existing clients to the Federal Emergence Management Agency (FEMA). Shippers that had long-standing, strategic relationships with their carriers were less impacted than those that didn’t. In other words, when the time came for carriers to decide which shippers got capacity and which ones didn’t, shippers that continuously treated their carriers well came out on top.
Similarly, during the capacity crunch that existed a few years ago, many shippers adopted “carrier friendly” practices. One of these practices was paying carriers faster. In March 2005, I participated in a webcast with the director of logistics at Orange Glo. One of the reasons the company implemented a transportation management system (LeanLogistics) was to streamline and automate their freight audit and payment process. By facilitating the payment process, Orange Glo was able to obtain favorable rates from carriers. Pinnacle Foods is another example. The company receives a rate reduction from carriers by reducing the payment cycle from 30 days to 5 days. Pinnacle implemented a self-invoicing process, whereby they pay carriers the amount calculated by Lean’s TMS upon receiving the proof of delivery (workflows for addressing unintended accessorial fees are part of the process).
Last week, I highlighted the potential for shippers to “strong arm” their carriers into getting lower rates in this economic environment (“Transportation Statistics Point to Continued Economic Woes“). The FT article underscores the advice I gave in that posting: Smart shippers understand that maintaining “carrier-friendly” practices at this time is the best approach. Shippers that establish “strategic” relationships with their core carriers today will be in the best position to weather future challenges.
And from a supply chain perspective, now’s the time to “walk the talk”-if you truly believe in supply chain collaboration and the importance of taking a holistic perspective, there’s no better time to prove it than today.
