Minority Supplier Payment Term Challenges at Diversity Alliance 4 Science: In the Shark Tank!
I participated in the Diversity Alliance 4 Science event last week held in Newark, NJ. For those of you who don’t know, this is a fantastic event held by most of the major life sciences companies, to encourage networking and open collaboration with a host of small, minority-owned, women-owned, and veteran-owned businesses. Life Science companies have a commitment to increase the value of their minority spend, and all of the majors (GSK, Merck, Pfizer, Novartis, Amgen, BiogenIdec, Teva, Takeda, and others) were present and actively engaged with suppliers. Networking sessions led to opportunities to bid on new business, as well as sharing of opportunities and challenges.
I helped to facilitate one of the workshops, called “Cash Flow for the Business: Understanding Payment Terms for the Good, the Bad, and the Ugly, Supplier and Corporation. The objective of the session was to identify and discuss key concepts which all suppliers and corporations should be aware of in the current business environment, and provide insights into the trends, challenges, and opportunities to overcome many of the different cash flow scenarios encountered by minority suppliers.
The workshop was also “played up” a little bit, by having a ‘Shark Tank’ theme. As anyone who has watched the show knows, there is usually a panel of financial and business experts who are listening to a “pitch” by an entrepreneur, and critiquing him/her and offering advice. In this case, the entrepreneur was Luke Twomey, Director of Finance, for Philosophy IB, a small diverse supplier from New Jersey. The “sharks” in this case included Todd Bittiger, Senior Manager of Sourcing from Novartis, Thierry Cauche, Finance from Novartis, Jon Heuser and Len Dunleavy, from J.P. Morgan’s Supplier Finance Program and Global Trade and Loan Products, and Carmen West, form the Minority Business Development Agency, US Department of Commerce.
I opened up the panel by introducing the problem of supplier payments. New suppliers, especially smaller ones that tend to be in the diverse supplier space, are often eager for new business, and when they encounter the typical leadtime on most “big pharma” supplier payments, which span 90-120 days, they are astonished. However, they often don’t want to disclose their challenges in managing working capital under these conditions, as they are afraid of losing face and thus losing the business. Buyers, on the other hand, are often completely unaware that there is a cash flow challenge associated with these long leadtimes on payments. The workshop was intended to emphasize the importance of transparency, regular performance reviews, and open discussion of how to reduce supplier risk under these conditions.
Luke was the “entrepreneur” in this case, and emphasized that his consultants often didn’t want to potentially damage their client relationships by bringing up the long payment terms. He also noted that financing solutions for operation were needed, but that such arrangements were not evident, and it was not clear where a supplier was supposed to go to explore these conditions.
The first “Shark,” Todd from Novartis, passed on the “typical” procurement managers’ response, which was generally unsympathetic to the supplier’s plight. (Note this was a “role play”, and in no way reflects the typical response from Novartis on this position!) In general, Todd emphasized that he had risk concerns with a supplier who balked at these payment terms, and that there was a possibility they might default on their obligations. Further, he was also concerned that the commercial credit expense for commercial loans to cover working capital obligations might be passed on to the buying company in the form of higher prices and higher cost of operational rates.
Next, we heard from Thierry Cauche playing the “Finance Manager” role. Thierry emphasized that big pharma companies struggled with their own long cash payment cycles from insurance companies and governments, and were merely passing on their own cash flow elements. He emphasized that pharma companies were not in business to be a bank for suppliers, but acknowledged that poorly functioning Procure to pay systems might often cause delays if suppliers did not properly complete invoices, left out crucial information, and other transactional issues.
Next, Leonard and Jonathan from JP Morgan introduced the concept of Supply Chain Finance. In effect, this was a program where a supplier would work off a program sponsored by a specific pharma company, and could get early payment less a small discount factor, leaving the payable with the bank. The benefit was that the buyer would not be aware of this transaction, it is optional (on an invoice by invoice basis), and would not negatively impact the suppliers’ credit score. The discount rate would be based on the buyers’ credit score, not the suppliers’, so it would be a very reasonable number.
Finally, Carmen pointed out that the MBD Agency at Commerce was actively encouraging major corporations to drive these types of supply chain financing programs, and to also promise to provide lower leadtimes on payment terms to suppliers. This is recognized as a critical element to promoting supplier diversity in the United States.
There were, of course, some interesting questions and answers following the session, but it was clear that this is an important topic which affects many different suppliers in multiple industries. One of the key takeaways is that suppliers should be “up-front” in discussing their payment term challenges with buyers, and that they need to be proactive in participating in buyer-sponsored financial programs by major lenders. Buyers also need to be more forthright in educating suppliers and making them aware of programs such as the one that exists between Novartis and JP Morgan, and introduce suppliers to the right people to facilitate these arrangements. In general, this is an issue we will continue to see as being a rich area for research going forward … there are no simple solutions!