Customer-Supplier Peaceful Coexistence

One of my earliest memories from my first corporate job was being taken on a tour of the manufacturing plant I had been hired to "fix."

The Vice President who hired me had given me my marching orders the first day. They were: "No one talks to each other. No one trusts the data. Too many decisions are being pushed up to my office. Go fix it."

That was it. I knew what I was supposed to do. Sort of.

I started with a tour. This was an aerospace/defense plant working on ground-based radar systems that was part of a much larger entity. Our division, on the small side, had a population of just over 5,000 within a group of about 20,000 - within a company that, at that time, had been downsized to just over 100,000.

My VP was correct. No one did talk to anyone - within manufacturing or between design engineering (let alone R&D) and manufacturing. Memos flew across and throughout the enterprise, but it was unheard of to sit and talk about anything...particularly in advance. That never happened.

As for the data, forget it. Every department collected its own data (sometimes there were multiple competing data sources within a department) and even though the inter- and intra-departmental memos invariably included someone's compelling data about how badly someone else was affecting their department, no one believed it anyway. In fact, most of the time, no one even read the reports.

So, yes, decisions were being pushed upward. My poor embattled, constantly arbitrating, mediating and, ultimately, deciding VP had no time to spend on his own activities. So, little things like strategy and innovation in a competitive landscape that was changing radically even as government contracts were being moved from cost plus (with the money taps always on) to fixed cost (where, suddenly, accountability and performance were life or death issues) weren't being given their due. In fact, he was rarely able to keep them on his radar.

But, back to my tour.

Contrary to the thinking of my tour guides, I thought it important to visit the back office functions as well as the manufacturing floor. Sure, all the visible, sexy action was going on out on the floor. But the only way those things could happen successfully, I knew, was if the back office was doing its stuff to the highest possible levels of performance.

So, much to the dismay of these "manufacturing guys" who were sure they knew better than I, they walked me around the areas that they rarely, if ever, visited. One of those was Finance and Accounting.

As soon as we walked in, I had a feeling that we were in trouble. Call it a premonition.

Actually, you can call it good eyesight - because it came from a series of signs made from flip-chart paper that were posted on the walls. Each was headed with a skull and crossbones and followed by lists of names. There were six or so of these posters.

As we toured, I stopped and asked one of the accounting folks what those signs were. He explained, with no hesitation and a certain level of pride and glee, that those were the lists of names of suppliers that the company - my new employer - had put out of business.

How, I asked, could that happen? (I was such an innocent.)

He told me that the company policy was that payment was made to suppliers in no less than ninety days from the date of invoice. He also explained that, more often than not, they didn't make the ninety days and it was more like 120 to 150 days before payment arrived. As a result, because so many of the suppliers were small businesses, they didn't have the operating capital to stay in business and they closed.

His pride came from two different directions - both internally generated. The first was that one of the metrics used in his annual performance appraisal was how long cash stayed in house. As such, it was in his personal best interests to find reasons to delay payments for as long as possible. The second was that, among his colleagues in the Finance and Accounting Department, an informal competition had grown to see who could put the most suppliers out of business. He was quite proud of his standing among his peers.

I was appalled.

However, because I knew that the employee was only doing what his management told him to do, I thanked him politely and continued the tour.

Eventually, as was also planned, I made my way to my one-on-one meeting with the Finance Director. That conversation was a somewhat different story.

As gently as I could (I was new, after all, and didn't want to start off by creating an enemy), I asked him whether he had thought about the internal and external costs resulting from this policy. I asked the extent to which the cash flow policy was dictated by our corporate parent versus being internally generated. I asked if his appraisal included the same cash-flow criteria as his employee described - only on a larger scale.

I then wondered about the impact on the manufacturing lines when each supplier - who went through a months-long certification process and worked to rigorous specifications - went out of business and either other suppliers needed to be found or the amount ordered from existing suppliers had to be unexpectedly increased.

I asked about the quality of the product being produced and delivered. Did he know, I queried, whether there was a quality differential on a by-supplier basis that was experienced on the manufacturing floor - and how these policies were impacting the longer-term costs?

And those were the easy ones.

Yes, the company of which I was so proud to be a new employee was, in part, measuring its success by how many suppliers it could make bankrupt.

That was not a proud moment.

But it taught me a very important lesson. Too rarely do customers and suppliers truly examine how they impact each others' operations. Too often it is simply a case of "we want it; you produce and deliver it; we'll pay for it" without looking at the internal and external context of how that product is to be used.

Why this story comes to mind is because I was recently reading about B&Q, a large DIY chain in the United Kingdom which has recently established a mandatory ninety-day payment policy to which they are demanding their suppliers all agree. If not, it seems, the supplier will no longer be a supplier.

I understand that it's a tough economy. I know that cash is king, queen and emperor. It's not out of the question that B&Q, a corporate Big Boy, would need to manage its cash flow. Moreover, I know that it is not just B&Q which has these sorts of policies.

The problem in these cases, is that too many of the suppliers impacted are small businesses - some micro - who provide specialized product at specific times. In the B&Q example, among the horticultural set, their cost base, no matter how well controlled, is high and the challenges they face - in everything from growing and packaging to delivering product on time and in the appropriate condition for optimal display - are legion. For these small businesses - and even some of their mid-sized brethren - a ninety day payment schedule can represent the end of their business.

Yet they sign the contract because they want the gig. They go in hoping that they will be able to control their costs to such an extent that they will live to see another ninety day payment cycle. Sometimes they do. Too often they don't.

Sometimes, as with my first corporate employer, even though the promise is ninety days, the reality is much longer than that. An invoice was misplaced. The payment date was entered into the system incorrectly. Electronic payment is not offered and, as a result, the supplier has to wait until the next check-run (which could be monthly) before a check is cut and sent.

The reasons really don't matter. The problem is that, unless and until customers and suppliers can find systematized methods for peaceful coexistence, decisions to work together will be designed to hurt the other entity. Even though it is supposed to be a mutually beneficial alliance.

Let's go back to our suppliers. For those who stay in business, their willingness to go that extra mile to help their customer who pays so late succeed goes seriously by the wayside. What's in it for them, they wonder - and they're correct. When a customer is doing its best to ensure that the supplier is feeling more like an adversary than an ally, the supplier will turn its attentions to those who work cooperatively with them. Those that understand that there is benefit in a positive, collaborative relationship. That success is a result of mutual activities - not just one side of the equation.

Then, when the suppliers have built a stable of customers who work collaboratively with them - where each understands the others' needs and actively commits to helping create mutual success - they will happily walk away from the customers who don't play that way. There will be nothing in it for them to stay.

As for our customers, punitive or risk-creating policies in any form, ultimately, increase costs and decrease productivity.

Let's go back to my Finance and Accounting Department.

Keep in mind that we were building ground-based radar systems. For all the testing that went on before any product was shipped, the real test was in the field. By soldiers. Lives were, literally, at stake.

When my company forced suppliers out of business - each of whom knew and were working to the company's engineering, design and manufacturing specifications - we lost more than just a supplier. We lost a dedicated resource which understood what the needs of the project were - not least because of the rigorous certification process they had successfully completed. We lost innovation and opportunity - because there was something in it for those little guys to figure out even better ways to provide what we, the Big Boy, needed. We lost money and time - because we kept losing our suppliers and, as a result, had to keep looking for and certifying replacement companies. Most important, though, is that we put lives at risk - because with constantly changing suppliers, we created a constantly questionable quality of product performance.

That was internal just to us. Now think about the tens, hundreds and, over years, thousands of people who became unemployed because of our payment policies. Good economy or bad. It didn't matter. People lost their jobs because of us - when it really wasn't necessary.

It was a policy of unintended but wholly unconscionable outcomes. We got it changed.

I know that the B&Qs - and others - of the world aren't and don't think about a direct risk to lives. But lives - or at least quality of lives - are at stake.

Frankly, no matter the size of the company, these issues remain a constant. When you're the customer, look at your payment policies in a larger context. Make sure that your Finance Department is working cooperatively with the rest of your enterprise to ensure that, at least from your point of view, you're not doing anything that will keep the rest of the company from succeeding.

When you're the supplier, be smart - and be willing to walk away. Don't do a deal with a business that you know is going to hurt your company. Just as you wouldn't give a pack of cigarettes to your child knowing that it can hurt them, you don't do a deal that you know will have short- or long-term negative effects on the health of your business. You walk away.

I know that that puts the onus on the suppliers to be even more proactive about having prospects in the pipeline. I know the amount of work that that entails and the problems it creates in prioritization and resource allocation.

Good. It's a platinum problem. Be overloaded with new and impending customers. Work with those who will work with you to create success for you both.

Big the same. It's in everybody's best interests.