The slap game is a popular tradition for middle school kids looking for ways to fill the monotony between classes. Opponents face each other and attempt to slap the other’s hands as quickly as possible. It's a great test of reflexes, but both opponents eventually end up with red welts on their hands. Nobody wins this totally pointless game.
Companies are playing the slap game with each other when managing working capital.
Procurement departments slap vendors into 60 or 90-day payment contracts. Meanwhile the same company’s sales organization is getting slapped by their customers' procurement departments. Not too long ago, 30 days was the standard term for a vendor contract. Today, procurement and supplier contract organizations are pushing the envelope to 60 and even 90 days. This is completely ridiculous!
Companies extending each other’s payment terms is unadulterated working capital gamesmanship. There's no winner and most organizations are actually slapping themselves with additional headcount costs, poor pricing, and quality issues.
To perpetuate the working capital gamesmanship, organizations create and staff contract ansourcing functionsto pressure vendors into submission. These functions delay contract agreements while adding administrative overhead. According to surveys, an average $1 billion organization has double the necessary contract and sourcing staff. This staff costs an average of $2 million per year while only saving $1 million per year in working capital gains for 30 days DPO. What's the point?
Savvy sales organizations have become less lenient with pricing concessions on slower paying customers. A recent survey of pricing scenarios is eye-opening. Pricing concessions on 30-day payment term customers was 2% more favorable than 60-day payment customers. This translates into $6MM per year in excess spending for a $1 billion company. In other words, organizations are spending more to spend more. Red welts are showing!
Organizations have a greater incentive to keep the faster paying customers happy. In a survey completed by Trenegy in 2013, faster paying customers tended to get priority for shipping, service response time, and overall quality. Poor vendor quality can cost more than the savings in working capital. The red welts are now hurting!
Working capital management is typically the window dressing on the balance sheet and should be properly managed. Unfortunately, organizations tend to take the path of least resistance. It's easier to beat up a vendor than push back on customer payment terms for fear of a lost sale. Losing a sale over payment terms does not happen. Organizations should spend less time fighting the vendor contract terms and more time focused on getting the customer contracts right. This is where the true value begins and the slaps end.
Trenegy helps companies develop processes to manage working capital without succumbing to the slap game. Contact us at info@trenegy.com for a free consultation.
