Cincinnati's Procter & Gamble is one of Ohio's largest companies in terms of revenue. (Photo credit: Wikipedia)
P&G announced today that they would be extending payment terms for suppliers from 45 to 75 days. The goal is to raise $2 billion per year for new capital expenditures. JC Penny and Walmart, among others, have already implemented slow-pay programs to save cash.
Two questions: Is it fair? Is this a strategy that will further confuse payment terms in supply chains?
For the fair perspective, what's fair? Oligopolists, meaning global consumer products companies with lots of desired brands in this case, have a lot of market power,especially with smaller suppliers. These suppliers will have to approach their already leery bankers for an increase in their AR lines, or seek other financing options to cover the extended float. Fair? It's all in the eyes of the beholder, but those who have the gold makes the rules. It does seem a bit cheesy on the part of P&G who can probably borrow money for less than 5%, compared to twice that interest rate for an AR loan for their suppliers.
Is this the start of a new trend in the supply chain financing? Manufacturers and retailers have historically extended payment terms in times of economic stress. This move feels different. If the P&G move sticks, and there is no reason to think it will not, many others will follow, opening a whole new credit source for financing supply chain transactions. If the move is transitory, which it has been in the past, due to supplier pressure, then the supply chain financing options will return to some semblance of the past. P&G and others will work to make this stick. Where else can you get $2 billion in free cash without any work? Genius move on the part of the finance guys.
We'll see if this happens, but it does not look good for downstream providers, including software and hardware suppliers.
A VC in Vacationland 
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