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.