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Suppliers must lead in reshaping post-virus payment practices

By admin-demo 02 Jun 2020

Apparel suppliers are being urged to take the lead in setting up a group to shape new payment and terms practices for the industry as it emerges from the coronavirus crisis.

Suppliers must lead in reshaping post-virus payment practices

Apparel suppliers are being urged to take the lead in setting up a group to shape new payment and terms practices for the industry as it emerges from the coronavirus crisis.

The pandemic has exposed massive flaws in existing purchasing practices that have put massive risk on supplier cash flow and business continuity – with payment delays and reductions imposed by buyers likely to continue to cripple supply chains when demand eventually starts to recover.

But the transition from crisis management to recovery is also an inflection point where the industry has a unique opportunity to shape a new and mutually beneficial standard for payment and terms practices, according to Better Buying. 

Its latest global survey has found buyers’ attempts to mitigate the impacts of Covid-19 have shifted the burden of the crisis more heavily onto suppliers. 

The research carried out in early May is set out in a Better Buying Special Report on ‘Payment and Terms and the Need for New Practices.’ The second in a series, it builds on the guidelines for better purchasing practices released in April by the group, which is using supplier feedback to try to drive improvements in retail and brand purchasing practices.

As the pandemic has evolved, the latest feedback from suppliers in 30 countries now shows:

  • 62% of suppliers indicated that at least some of their accounts receivable with specific customers is past due;
  • Customers have required shipping dates to be pushed back for 69% of suppliers; and
  • Orders have been cancelled for 64% of suppliers.

Some suppliers also reported payment term extensions (most frequently beyond 60 days) and price reductions to existing purchase orders. One supplier shared its frustration: “Their actions have been despicable and unethical.”

Poor practices also intersect in troubling ways. For example, suppliers reporting larger amounts of their accounts receivable past due also reported that shipping dates had been pushed back for longer periods of time. This leads to compounded financial pressures on affected suppliers. 

Furthermore, the reported impacts are only based on one customer’s practices; suppliers are facing the cumulative impacts of all their customers’ practices during this crisis – the findings from Better Buying’s recent survey hint at the immense scale of the problem.

Such practices place workers in an extremely precarious position. Over half of the suppliers surveyed have had to lay off up to 50% of their workforce. These impacts fall disproportionately on women, as three-quarters of suppliers reported over half of their workforce is women. Most of these workers are located in China, Bangladesh, Vietnam, and India.

Regional differences demonstrate how critical it is to engage suppliers directly about the specific challenges they face. 

Suppliers in Bangladesh reported lost value of accounts receivable due to order cancelations more frequently than any other country or region, while East Asian suppliers more frequently reported required extensions to shipping dates. 

“These differences must be considered during the recovery phase in order to develop effective solutions to the problems plaguing suppliers and their workers,” report authors say.

A new vision

They add: “As our industry approaches an inflection point where crisis management transitions toward recovery, a unique opportunity presents itself: the change to shape a new standard for payment and terms practices.”

69% of suppliers participating in the survey believe there should be minimally acceptable payment and terms standards for buyers. The highest priority practices for implementation were:

  • Requiring supplier approval for chargebacks or other payment reductions (48%);
  • Digital settlement (40%);
  • Payment at sight or upon providing shipping documentation (39.5%); and 
  • Late fees for unpaid invoices (38.7%).

About one-third of suppliers (30.2%) said they want to join a standard-setting working group consisting of suppliers and/or buyers. Should a group of this nature be created, industry association leadership would allow the industry to tap into the valuable expertise of supplier members and ensure their needs are considered. 

“The belief that these practices should become industry standard reflect suppliers’ desire for more transparent payment and terms practices, reduced risk to receiving full and timely payments, and for more efficient payment processing,” says Kelly Allen, strategic partnerships manager for Better Buying. 

“These changes would mean improved access to capital at key points in the production process to pay workers’ wages and other expenses, protection against poor practices such as those that have been implemented due to Covid-19, and reduced risk to their ongoing business operations.”

Dr Marsha Dickson, Irma Ayers Professor at University of Delaware and president and co-founder of Better Buying, urges: “Manufacturers associations need to take leadership in convening a standards-setting group to immediately begin working on determining acceptable practices.

“Better Buying is ready to support such an effort and will work to secure robust supplier input into the resulting discussions.”

Click on the following link to read the Better Buying Special Report on ‘Payment and Terms and the Need for New Practices.’