A recently released Department of Commerce report, “The Economic Benefits of Reducing Supplier Working Capital Costs,” highlighted how much the viability of our nation’s supply chain depends on large firms paying on time. Our small manufacturing firms—which account for more than 1/3 of manufacturing shipments and close to half of employment—face elevated capital costs, relative to large firms, because of lack of access to loans and higher interest rates. Large firms exacerbated these constraints through the Great Recession when they delayed payment for the good they ordered. The economic recovery has not seen these times drop; indeed, one study found that corporate payables increased from an average of 35 days in March 2009 to 46 days in July 2014.
Cutting these times is not just good corporate citizenship. It makes good economic sense, as the new report outlines. With less working capital, suppliers’ ability to innovate or invest in their workers is inhibited, leading to lower quality goods and services. They may recoup the shortfall by raising prices, but this is not necessarily an option if they are competing with other suppliers. In the worst case scenario, they may exit the market, leaving a hole in the supply chain. Thus, an increase in suppliers’ working capital costs may ultimately accrue to the large buyer, in the form of lower quality goods and services, less stable suppliers that create risk for the buyer, and/or higher prices because of less productive suppliers.
Just last week, leaders from corporate America met at the White House to collaborate and help their suppliers succeed under the umbrella of the Administration’s SupplierPay. This initiative encourages large businesses to pay their suppliers more quickly to promote small business quality, growth, and innovation. Corporations can help suppliers avoid expensive, difficult to obtain bank loans, or other even more costly financing options. Since the SupplierPay Initiative began earlier this year, 47 companies have taken the pledge to pay their suppliers faster. These companies joined together at this week’s event to network, swap ideas, and exchange lessons learned as they take steps to help increase their suppliers’ access to working capital.
“When buyers pay their suppliers faster, they both benefit,” said Commerce Department Chief Economist Sue Helper. “This in turn allows suppliers’ working capital to be put to work for the benefit of the larger economy—their large customers included. Buyers also receive bottom-line benefits and fulfill their corporate social responsibility to their suppliers.”