It’s a bold statement, but the recent Filing of Chapter 11 by Toys-R-Us provides us with a timely example that the failure of businesses to build a position of payment certainty and therefore trust with their suppliers can ultimately lead to their demise.
A recent article by the Financial Times cites the key reason for the failure of Toys R Us wasn’t its ability to keep up with debt repayment but rather “a dangerous game of dominoes” prompted by a CNBC report in early September that said the toy retailer was preliminarily considering a Chapter 11 bankruptcy filing. The result was that nearly half the company’s vendors either stopped shipping or asked for cash on delivery just as the company was preparing for its busiest season. That squeeze led to a rushed bankruptcy filing on September 19.
A marriage of necessity
Companies, and especially retailers, rely on their suppliers to provide them with products on good payment terms so that they can effectively fund putting items on their shelves. And manufacturers rely on retailers to sell the products they manufacture. It’s effectively a close marriage of necessity. The impact to suppliers of their customers breaking off this marriage by going into bankruptcy can therefore be devastating. In the case of Toys R Us according to the FT Mattel and Hasbro, two of the largest suppliers, are collectively owed $200m in trade debt and Mattel dropped third quarter revenues by a fifth in North America, with half of that fall directly attributable to the fall of Toys R Us.
The importance of cash in supply chains
If we put aside the overall long-term ability of Toys R Us to compete in a modern digital marketplace dominated by the likes of Amazon, what led to their unexpected downfall was an inability to manage and optimise the movement of cash through their supply chain for both themselves and their suppliers.
What we are seeing in the marketplace is that the companies that are creating winning strategies are those that not only optimise the production and movement of goods in supply chains but also optimise the movement and allocation of cash. These companies recognize that their supply chain is a critical factor in ensuring overall competitiveness and that funding of supply chains through timely payments and access to cash helps ensure trust, builds a sense of partnership and ultimately creates innovation and business growth.
Solving the cash dilemma
To give an example, at Taulia we are partnering with a global pharmaceutical company. They have a need for cash to fund R&D - developing a new drug can cost up to $1bn. One mechanism for them to obtain cash is to extend supplier payment terms. However, supply chain collaboration is critical to bring new drugs to market through areas like research, testing and manufacture. It’s simply not a viable strategy to stress their suppliers through reducing their access to cash by paying later. The solution to this apparent dilemma is to leverage a technology-led approach to offer all their suppliers payment from the moment the invoice is approved using funds from the financial markets. At the same time, they can better manage their payment terms to improve their cash position. What they are doing is effectively decoupling when they as a customer pay vs. when their suppliers get paid. The result? Both the pharma and its suppliers build their cash positions and thereby build their overall competitive position.
Technology - a force for good
The good news, therefore, is that while on one hand, the ever-increasing rise of technology can appear to be a disruptive threat for companies a.k.a Amazon and Toys R Us, on the other hand, companies can now leverage these new technologies to transform the way cash is managed and optimised through supply chains.
Companies that understand and take hold of these new technologies - like the pharma company that Taulia works with, are the ones that are building a position of stronger liquidity, trust and collaboration across their supply chain and therefore their overall competitive strength. As the unfortunate example of Toys R Us shows us, it is the companies that take this approach that are more likely to be around for the long run.