Five things to avoid when extending supplier terms

June 27, 2018 Kjel Christensen

Planning to extend the payment terms offered to your suppliers? If so, you’re not alone: many companies do this when optimizing their working capital. But all too often, terms extension projects fail to achieve their desired goals – or, worse, can damage supplier relationships. So before you get started, here are the top five pitfalls you’ll need to watch out for:

1. Dear Supplier…

Naturally, you’ll need to communicate the change in payment terms to your suppliers. After all, securing agreement from suppliers is key to the project’s success. But sending a generic ‘Dear Supplier’ letter or email can backfire.

For one thing, the message needs to reach the right person – but contact details can and do change over time. One company saw 30% of its emails bounce back, resulting in a double triage situation: one set of contacts pushed back against the terms extension, while another set failed to receive the communication at all. So take the time to check that your supplier contact details are up to date before hitting send.

Just as important is knowing how to handle queries from suppliers. If suppliers object to the terms extension, they will probably raise the issue with their own contacts. Make sure that everyone concerned knows how to talk to suppliers about the changes and handle any exceptions.

Likewise, you’ll need to identify legitimate exceptions – such as countries where extending payment terms may be illegal in some situations – while holding your ground on non-exceptions.

2. All stick, no carrot

Failing to gain agreement from suppliers is a very real problem. Adoption rates for some initiatives can be as low as 20%, meaning that the benefits may be limited at best. And even if the extended terms are strictly enforced, the program’s success can be undermined if suppliers respond by raising their prices.

Key to avoiding these issues is offering suppliers a carrot. Supply chain financing and dynamic discounting solutions mean you can pay suppliers earlier in exchange for a small discount, sometimes giving suppliers the flexibility of choosing when they want to get paid. This can make the initiative more compelling for suppliers, while also boosting your supply chain health.

3. One size fits all

Strategically speaking, some suppliers are more important than others. Treating everyone the same can spell disaster – as one manufacturing company found when its most strategic suppliers threatened to stop key shipments after receiving a ‘Dear Supplier’ letter.

To avoid this scenario, hold executive level discussions with strategic suppliers before sending out an official letter. You should also consider how to handle suppliers who are being phased out, or who are being newly onboarded. It may be tempting to extend terms further on indirect suppliers who are more easily replaced – but consider what the impact will be if they can no longer supply important services.

The better you understand individual suppliers, the better you can tailor your approach. To that end, Taulia has invested in an AI database which gives insights into individual suppliers, thereby providing clarity about how these suppliers should be handled.

4. Lack of internal co-ordination

As noted above, failing to prepare supplier-facing staff for the onslaught of supplier inquiries can seriously undermine the effectiveness of the initiative. In many cases, staff who have not been briefed will tell suppliers that the new terms do not apply to them, or may advise suppliers to request an exception. So all stakeholders need to understand the goals of the exercise and know how to respond to queries.

If you’re combining a terms extension with a supply chain finance or dynamic discounting program, it’s even more important to get everyone on the same page. For example, one company promised suppliers a dynamic discounting solution to support early payment discounts without properly aligning treasury and procurement. In reality, the company’s high cost of capital made it impossible to deploy cash early at a rate that would be attractive to suppliers – meaning that those promises could not be kept.

5. No mindset shift

Last but not least, you may need to bring about a significant shift in mindset across your organization. Extending payment terms to 60 days is unlikely to go down well with suppliers if they are then consistently paid later than 60 days. So before terms are extended, you’ll first need full control over the timings of payments, as well as the ability to approve invoices rapidly.

Likewise, everyone concerned needs to understand that both suppliers and buyers can end up in a better position if a program is handled correctly. For example, an early payment program could mean that suppliers are now paid in five to ten days, despite the terms extension – and that they no longer need to borrow from the bank to cover operations while awaiting payment. If both sides realize they can benefit from the program, adoption levels are likely to be significantly higher.

Final thoughts

A terms extension can bring significant benefits, but it’s essential to be aware of the possible pitfalls from the outset. The good news is that with proper planning and a thorough understanding of your supplier base, you can overcome the challenges and achieve the results you are looking for.

The bottom line: supplier agreement will be key to your program’s success – so put suppliers at the center of your planning, rather than making them an afterthought.

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