In an economy marked by rising inflation and cost pressures, every business is paying close attention to its bottom line and slashing costs wherever possible. Cost-cutting isn’t something suppliers are all that excited about. And rightfully so because it impacts their income and cash flow. But because so many businesses are feeling the recession pinch, many manufacturing companies will look to negotiate their supplier contracts and get some form of a discount. That’s what Creditsafe’s latest research into overseas manufacturing found, with a staggering 95% of North American manufacturers planning to ask for discounts from suppliers in the next six to 12 months.
There are a few reasons businesses would ask for supplier discounts. For one, a company might not have enough incoming revenue to offset its payment obligations to vendors, suppliers and employees – making discounts more of an urgent necessity. Of course, your company doesn’t have to be embroiled in financial turmoil to ask for supplier discounts. You could simply be doing it as a proactive measure so that your company doesn’t get caught off guard if there are declines in customer demand and sales down the road. It’s a smart strategic move, as it allows businesses to be more nimble and more resilient.
The Art of Negotiation: Lessons Learned from Whole Foods, Levi’s and GAP
Price haggling is an inherent part of working with international suppliers, with both parties striving to secure the best possible deal. As observed in recent years, an increasing number of manufacturers are requesting discounts from suppliers.
Whole Foods Inc. is a perfect example of a business using supplier discounts as a proactive cost-cutting strategy. Despite having a strong cash flow, the grocery chain recently asked its suppliers to lower their prices. With 513 locations across the United States, Whole Foods falls into the category of a large business. On top of this, our platform data shows that the company has an impressive credit score of 80 (placing it in the 'very low risk' category) and a credit limit of $10 million. These two data points alone signal that money troubles aren’t driving its request for supplier discounts. At the same time, the grocery chain has maintained an impressive track record of paying suppliers on time, with only 8% of its invoices paid late.
Similarly, clothing manufacturers Levi's and GAP have requested discounts – ranging from 10% to 20%. While understandable from their perspective, these discount requests can also add pressure on suppliers. Most importantly, it should be a wake-up call for suppliers to proactively manage their cash flow and put the right financial management practices and tools in place to effectively sustain operations even after accommodating any requested discounts.
But negotiations between manufacturers and suppliers isn’t just limited to price. If both parties are managing their risk effectively, they’ll come to the table with a clear idea of what the best payment terms are. Why? If a manufacturing company is dead set on Net 90 payment terms, that could be an early warning sign that the company may have cash flow problems and anticipates needing extra time to pay its invoices. That’s certainly something the supplier should know up front. The only way to know that is to have full visibility into their creditworthiness – their credit score, credit limit, Days Beyond Terms (DBT), percentage of past due payments and more.
But the good news is that both manufacturers and suppliers appear to be on the same page when it comes to their payment preferences. As the Creditsafe study reveals, both sides prefer to either pay a partial deposit first or agree to Net 60 payment terms.
Supplier Over-Reliance Can Deplete Your Inventory and Frustrate Customers
When working with international suppliers, most businesses find themselves debating what the right number is and what countries are best to source production. These are important questions to ask.
Imagine a scenario where over 50% of your international suppliers are concentrated in a single country that’s experiencing political unrest. Worker protests and factory shutdowns in such situations are quite common, meaning you’re more than likely to have your production stopped for an extended period. This scenario is more common than you think.
In September 2021, Lululemon’s chief executive, Calvin McDonald, admitted that its over-reliance on factories in Vietnam during the pandemic wasn’t the best strategy and had caused considerable production issues for the athleisure brand. Our study reveals that 35% of companies could find themselves in a similar situation, as they rely on fewer than 500 international suppliers to complete the production of their goods.
For larger manufacturing companies, it’s better to use a larger number of international suppliers and spread production orders across multiple countries so you don’t end up with insufficient inventory and frustrate your customers in the process. So, you can imagine my surprise and dismay when I saw that only 7% of the companies in our study said they distribute their production across 10,000 to 15,000 suppliers and a mere 3% use more than 15,000 suppliers. These findings reiterate my position – diversifying your supplier base is the best way to de-risk your supply chain and keep your loyal customers happy and buying more from you.
Nearshoring vs. Offshoring: Supplier Due Diligence Plays an Integral Role
The decision to use suppliers closer to home (nearshoring) or overseas (offshoring) is one where cost savings usually have a strong influence. There are pros and cons to both sides.
Nearshoring can offer some of the same cost savings as offshoring, but with fewer risks. For example, businesses can drastically reduce shipping costs by using suppliers closer to home. They can also improve communication and collaboration – and make trips to production facilities at relatively low cost, if needed.
Offshoring, on the other hand, can offer significant cost savings. But it can also come with its fair share of risks, including shipment delays, quality control issues, higher shipment costs, language barriers and disruptions caused by geopolitical unrest, climate change or pandemics. It’s important to weigh the pros and cons carefully before deciding whether to nearshore or offshore your production.
Regardless of where you outsource your production, credit risk monitoring should play an integral role in your decision. And that decision shouldn’t just be based on pricing and payment terms. While those factors certainly matter, they shouldn’t be the end-all-be-all in your decision process. You need to have a clear picture of your suppliers’ financial wellbeing, including their annual revenue, profit, cash flow, credit score, credit limit, average DBT (days beyond terms), how their DBT compares to others in the industry, total amount and cost of legal filings, total number and amount of past due payments and more. All this data tells an important story – one that you should pay close attention to before signing any contracts and submitting work orders with suppliers.
For example, if you see that a supplier has a low credit limit and over 30% of its invoices have fallen into ‘past due’ status (amounting to millions of dollars), that indicates that they likely won’t have enough cash in their accounts to source the materials to produce your goods and could be on the verge of shutting down permanently. So, you could end up with a production stoppage and inventory shortage. That’s not good for your customers and it’s certainly not good for your bottom line.
Making Use of Credit Risk Intelligence and Compliance Tools to Vet Suppliers Thoroughly
Without credit risk intelligence platforms, you wouldn’t be able to run credit checks on international suppliers to make sure they have enough income and cash flow to pay their employees, pay for materials and complete production orders on time. Think about it this way. If one or more of a supplier’s factories shut down for any reason (i.e. financial trouble, political unrest, worker disputes, pandemics), then your business will have to figure out how you’ll get those orders completed from other suppliers in time.
Technology isn’t just useful for understanding the financial stability of international suppliers. It’s also a critical tool for screening international suppliers, including directors in the company, against real-time sanctions databases, global enforcement lists, adverse media, state-owned companies and Politically Exposed Persons profiles. Can you imagine how long this would take and how hard it would be to spot red flags if this was done manually? It would be a nightmare, to say the least.