On better terms with large customers

Why do large OEM customers work so hard to not pay their metal fabricating service suppliers right away?

As I was doing my best to moderate a panel discussion with three bright minds from the banking and private equity community speaking to a room full of inquisitive fabricating shop owners and managers at The FABRICATOR’s Executive Summit in late August, I asked a question of the audience about their average number of days in accounts receivable. That sparked some pretty lively conversation.

• “I had a large company buy our largest customer, and now they are asking for 120 days [for payment terms].”
• “Why would they do this? It prevents us from reinvesting in our own businesses.”
• “They are basically asking us to finance their business.”

This obviously peeved many in the room as they viewed these unfavorable payment terms as just another example of a large company throwing its weight around when it should be doing more to support the viability of the entire supply chain. If these large companies are starving their metal fabricating service providers just so they can squeeze 30 more days of interest out of their own money, they are introducing a lot more risk to the supply chain than they might realize. Simply put, if shops are deprived of prompt payment for services delivered, they don’t have as firm of a foundation to survive the inevitable revenue swings that are a reality in a fabrication shop.

FMA’s “Financial Ratios & Operational Benchmarking Survey,” which the panel was discussing, has shown a gradual increase in days in accounts receivable (total sales/average accounts receivable). It’s crept up one day for each of the last four years: from 43 in the 2013 survey to 46 in the 2016 survey. For a small business, that sort of trend can prove to be a real pain, particularly if that customer represents a huge chunk of overall revenue. Job shops know the importance of customer diversification, but when customers start to expand and send more work over, job shops aren’t going to say no. Organic growth is the easiest way to boost revenue—even if it comes with more headaches.

One fabricator even mentioned that these large companies looking to save every penny they can will even work payment terms into their supplier score cards. A fabricator might receive a score of 10 for meeting quality benchmarks and on-time delivery deadlines, but it also might be dinged heavily with a score of 2 if it offers 60-day payment terms. This sort of practice only entices bad business practices. It’s hard to fathom.

The fabricators involved in this discussion realize why these situations exist: The executives in these larger companies are being rewarded for this behavior. These purchasing agents are wringing their suppliers for every last cent, and their supervisors are earning nice bonuses.

Many might argue that business is survival of the fittest. Well, I don’t think this means that fit companies should make it their business to eat their partners to survive. They should be invested in the success of the entire supply chain as that is where so much untapped innovation is waiting to be discovered. If a metal fabricator is scrambling to survive and meet its payroll, it’s not going to have the time or motivation to look for new designs or production methods that could ultimately save a customer money.

The best thing is that metal fabricators actually practice what they preach. On more than a couple of occasions, I have heard about fab shops paying their raw material vendors within the much-more-welcomed 30-day term and receiving high levels of customer service in return. When these fab shops ask for multiple deliveries during a day, the service center is more than willing to consider the arrangement. When a hot order is placed to accommodate a rush job, the service center picks up the phone and works to accommodate the delivery. Respect and trust are much healthier motivators than fear and threats.

Keiretsu is a word that describes how Japanese manufacturing companies seek to have trustful and collaborative relationships with supply chain partners even as they tackle tough subjects like cost-cutting. They know everyone is stronger when they work together. Let’s hope that large U.S. manufacturing companies come to better terms with their own supply chains.