Companies Dramatically Slow Payments to Suppliers Due to Pandemic

Companies dramatically slowed payments to suppliers, which disrupted demand and drove unsold inventory to higher levels.

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The Coronavirus disease (COVID-19) pandemic drove significant changes in working capital performance among the 1,000 largest non-financial U.S. companies in 2020, according to new research from The Hackett Group, Inc.

For instance, companies dramatically slowed payments to suppliers, which disrupted demand and drove unsold inventory to higher levels. In addition, companies increased their cash on hand by 40%, while capital expenditures fell to record low levels.

“Liquidity was of crucial importance as companies responded to the pandemic, driving companies to conserve cash and increasing debt, to put themselves in a better position to extend terms to customers, support suppliers and weather unforeseen changes in market conditions,” says Craig Bailey, associate principal, strategy and business transformation, The Hackett Group. “On payables, we saw many companies simply forced their suppliers to take 30-day term extensions. But, some were able to support weaker suppliers to protect their supply chain. On the inventory side, companies in many industries saw dramatic revenue drops, and responded by consolidating their offerings or otherwise simplifying their mix of products.”

“The pandemic has also driven significant changes in consumer buying habits,” says Bailey. “Customers have leaned heavily on e-commerce this past year, and looking forward, it’s hard to predict if or when traditional demand patterns and buying habits will come back. Companies need to foster greater agility, so they can dial production up or down to match demand and also shift sales channels as necessary, moving more business to e-commerce if customer demand warrants it.

“Inventory management will also be key. There’s a lot of uncertainty going forward, and companies that have greater ability to manage inventory levels will be in a better position to respond quickly to market shifts. But, inventory has historically been a difficult area for companies to optimize, as different parts of a company, like sales or manufacturing, often have competing priorities and goals in terms of inventory,” Bailey adds.

From The Hackett Group:

  • Days payable outstanding (DPO) was the main working capital shift evident in 2020, rising by 7.6%.
  • Upper quartile companies now convert cash more than 3 times faster than typical companies (15.7 days vs. 46.4 days).
  • Cash on hand increased by 40% year-over-year, the first significant increase in a decade, while debt continued its long-term upward climb, driven by low interest rates and available credit, increasing 10% year-over-year.