Will the SupplierPay program boost small business sales ?

An article in the Wall Street Journal (July 11, 2014) titled “Apple, Coca-Cola Among Firms Signed on to White House Plan for Small Suppliers”, describes a voluntary plan announced at the White House under which small suppliers would be paid faster, usually within 15 days of delivery. The goal is to increase access to capital at lower costs and mimics the federal government’s QuickPay program. But will the faster payment terms also mean that prices charged by suppliers will be forced to decrease, given that their costs are now lower ? Will faster payment just shift the cost from the supplier to the buyer, albeit at a lower financing rate, thus lowering supply chain wide costs ? Why are such programs not already in place driven by buyer self-interest ?

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19 Responses to Will the SupplierPay program boost small business sales ?

  1. Vivek Kaimal says:

    In my view this is a really good way to support smaller industries. In addition it also helps the buyer in the way that he gets a better (lower) cost. So it is a win-win for both. It will involve shifting in financial costs from the smaller supplier to the bigger buyer, but if the trade-off between lower costs and higher financing costs are in favor it is definitely good!

  2. deepakregu says:

    The SupplierPay program will release easier working capital to small suppliers who otherwise would have to seek working capital loans or more expensive means of financing the credit they offer to their customers namely firms like Coca Cola. This need not be followed by a decrease in prices as if price offered by OEM is reduced, then the supply would be lowered in priority with the supplier. As the buyer has a lower financing cost, it would lead to lowering of overall supply chain costs. This was not considered till now in buyer interest as the supply chain as a whole entity was not considered integrally and focus was earlier on firm-wise interests and costs only.

  3. Sarath Suresh says:

    The decision looks very good at the face of it.One of the primary difficulties faced by the smaller suppliers is the access to capital and thus a reduction in payment cycle is definitely a boost to them.However, one must understand that every action has an equal and opposite reaction.This decision will affect the cash cycle of big players like Coca Cola and I am pretty sure that they will not take this without seeing a benefit in the long term.Thus the fear of having to reduce prices seems very much happening in the near future resulting in this program not yielding the results it was aimed at.

  4. Rohit Singh says:

    A good move for the smaller business. For the larger businesses, they get better prices but it does strap their cash cycle and may not be viewed as a long term plan.

  5. Yang Liu says:

    It is applaudable to facilitate such an announcement, which help the small suppliers to grow and urge mature enterprises to evolute.

    For the small supplier who own few assets, a delay paying decreases its available funds obviously, influences its cash flow badly and increases its cash-straped risk, which could be very crucial for their survival. This announcement promotes the receivables on the accounting record to be the money available in the bank to be invest in promising projects. According to enterprise life cycle theory, the small suppliers are usually in their investing stage or growing stage which has a high-speed growth but a urgent need for money. Fastening the payment of big enterprises is to some extent to fastening the invest-revenue cycle of small suppliers, which could benefit the economicsin the long run.

    For the big guys such as Apple, it seems not to be a good deal at the first glance. To pay the suppliers later means to make use of this money longer and almost for free. That could be an important reason for them not to do so spontaneously. However, such a delay triggers a sad story: the buyer pays the supplier late, then the supplier finds money with more cost and adds this operation cost to the price of its product, and finally the buyer will bear this cost itself. With the quick-pay announcement, it will be another story: the buyer offer a quick-pay contract appealing to many small suppliers, then small suppliers needing money comes and compete for that business, and the buyer has more choices for supplier selection and more bargaining power. That is also a good way to build up a more friendly relationship between seller and buyer. With these benefits, the big firms do have to figure out how to attract more money without squeezing the small supplier unhealthily.

  6. Trey Christner says:

    The faster payment terms will mean that prices charged by suppliers will be forced to decrease because of the competition between suppliers to offer the lowest cost. Also, I believe this faster payment will just shift the cost from supplier to buyer since the customer will start paying for this luxury.

  7. Ryan P. Case says:

    Questions… does this mean that the smaller suppliers are paid faster, so they have more working capital available to do more business? What is the definition of a small/larger supplier? Is it based on amount of working capital (… I’ll take, why I’m not a Finance concentration for $800 Alex)?

    • Kevin Morrisroe says:

      Ryan,

      As far as I know, there is no set definition of a small/large supplier. Perhaps the government has a standard they use for their QuickPay program. Can anybody concur?

      • aviyer2010 says:

        Kevin The Small Business Administration has defined it as follows “The SBA has established two widely used size standards – 500 employees for most manufacturing and mining industries and $7.5 million in average annual receipts for many nonmanufacturing industries. However, there are a number of exceptions. For the size standard applicable to any North American Industry Classification System (NAICS) code, see the SBA’s Small Business Size Regulations, 13 CFR §121.201 , or the Table of Small Business Size Standards . “

  8. Kevin Morrisroe says:

    Why are such programs not already in place driven by buyer self-interest ?

    Reducing a company incoterms to net15 is not an easy thing to do. Most companies average net30 or net60; decreasing their current payment terms by 2 or even 4 times is very hard for companies, no matter how big or small. Apple is able to do this due to their large amount of cash reserves but other companies will have a harder time trying to implement this.

  9. Qidi Cao says:

    In my opinion, the small suppliers will definitely get much more support and benefit from this supplier pay program. On the other hand, this faster payment does reduce some of the suppliers’ costs, so the price charged by them will decrease. As a result, the buyers are paying less money. However, this program might not last a long time.

  10. Rahul Srinivas Sucharitha says:

    The program of introducing the supplier pay concept will ensure capital to smaller suppliers. However, by introducing this concept, I dont think this should lead to lowering of prices because, there would then be lowering of supply and the cost of raw materials does not change. Also, by using this idea, the costs of customers would increase as they would be paying for the quick supply.

  11. Greg Nichter says:

    Cash flow is essential for any small or growing business. Many great businesses have failed because they have either spent to much upfront, or they become reliant on startup loans and become swallowed in early debt. In this way, I think this program would be a great asset for many small businesses if it is regulated correctly.

    • Joe Mista says:

      I agree with Greg. I think it’s a great plan on the face of it, but as the questions suggest, will this force these suppliers to lower their price? I do believe that others in the supply chain will demand a price restructure with this knowledge in mind. This method though does seem the best way to ensure supply chain profits, so it will be interesting to see where this goes.

  12. Christian Lehr says:

    In my opinion there will be positive effects for small suppliers only at the beginning. In the long term view the benefits for the suppliers will be negated, because they will have to decrease their prices in order to stay competitive. Depending on the products, either the firms that agreed to the voluntary plan or the buyer will get the benefits. If the firms decrease their prices to get more competitive, the buyer will directly benefit from the better coordinated supply chain. But as most of these firms have branded products with a low price competition it is likely that these firms will not reduce prices and keep the benefits just to increase their profit. Nevertheless the SupplierPay program is effective in reducing supply chain costs and therefore creating additional value. Unfortunately the weakest link in the chain that is the supplier in most of the cases will not cash in on it.

  13. Cheng Zhang says:

    The program will benefit small business definitely in multiple ways. Faster payment will reduce cost for small suppliers and consequently deliver this benefit to the customer, possibly leading to an increasing sales volume. For small business, cash flow plays an important role in their development and business. Although small business may be forced to charge a lower price, overall the program will do more good than harm.

  14. Jiawei Zhang says:

    It was seemingly that the faster payment will promote development of the small suppliers. But the US market was almost a perfect market, if this program did benefit the small suppliers, it would take place spontaneously. However, in fact, there was not similar market behavior before the White House announced this program.
    In real market, is was common that if you can wait longer you can get more discount. Similarly, if the small suppliers would like to get faster payment, they may gave more discount, which means the decrease of their profit margin. Whereas if the small suppliers retain the same profit margin, the capital cost would transfer to consumer. It was unexpected that the distributors or manufacturers were willing to bear the higher cost by themselves. Thus, the demand would be lower, and the profit of both suppliers and distributors would decrease.

  15. Manish Singh says:

    Federal government’s QuickPay program is certainly going to improve the cash flows,provide the working capital in due time,reduce the finance costs and keep the account payable low for the suppliers.The reason why this scheme is already not in place is that buyer has its own benefits from delaying the payment to the supplier – for example, Interest rates, other investments etc.In my opinion, only the beneficiary of this program are small suppliers who are in business with multiple clients, and due payments from all the clients within time can help them to function their business smoothly.And, I don’t think QuickPay scheme is going to affect the prices anyway, because buyers normally contract suppliers through competitive bidding so they are already getting optimal prices for the products and services provided by the supplier ,and duration of the payment has no say in negotiations until the small supplier provide the goods and services on credit.

  16. Kairui Jia says:

    I firmly believe it will improve SME’s performance, because cash flow is vital to any firms. As for cost transfer, I don’t believe supplier’s price will lower. Big companies support faster payment system may due to wishing to achieve supply chain coordination. Finally, I don’t think small suppliers have enough bargain power to force big companies pay faster.

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