Buyers are increasingly paying invoices late as they struggle to manage their working capital amid the global Covid-19 crisis, preliminary research from the SCF Community shows.
Corporate payment practices have worsened during the Covid-19 crisis with an increasing number of buyers admitting to paying their suppliers’ invoices late, according to the early research findings from Windesheim University of Applied Sciences, supported by the SCF Community.
Around 40 per cent of respondents said that invoices were being paid late, with 60 percent of them complaining of a delay of up to 30 days and the remaining 40 per cent saying that invoices were often still outstanding after 30 days.
Moreover, around 20 per cent of respondents said that during the Covid-19 pandemic they were paying invoices to their own suppliers late, 20 per cent of them by more than 30 days, the survey reveals.
“We are worried about the negative trend in the extension of payment terms to cope with the current crisis. It is happening a lot in the Netherlands and elsewhere in Europe, and it propagates through supply chains, creating a ripple effect of working capital problems,” says Christiaan de Goeij, a researcher at Windesheim University of Applied Sciences in the Netherlands.
Government lockdowns earlier this year, the closure of factories and the sudden drop in demand in certain sectors saw global supply chains collapse overnight leaving many corporate buyers stranded with a surplus of stock and no revenue. Other corporates in strategically important sectors such as food or medical supplies suddenly saw demand spike. Both scenarios placed new and unexpected pressure on corporates’ working capital requirements.
The research – which aims to survey at least 300 corporates in Europe by the end of the summer – will also look at the strategies companies are using to help manage their supply chains during this crisis and how effective they have been so far.
“We want to be able to benchmark companies’ supply chain strategies against each other, understand what works and what doesn’t work, and look at how effective companies have been in tackling the crisis and, on that basis, we can advise on how they can face the future,” explains Luca Gelsomino, senior researcher at Windesheim University of Applied Sciences, and academic director of the SCF Community.
The survey results to-date suggest that ‘less effective’ strategies to manage supply chains have involved attempts to negotiate changes to payment terms with suppliers or buyers, either looking to shorten or extend terms. One survey respondent out of three (that have tried this strategy) says that negotiating shorter payment terms with buyers is not effective in dealing with the crisis, while 15 per cent say that even renegotiating longer payment terms is not effective. Similar, although lower, percentages can be found when dealing with suppliers.
The survey revealed other ‘effective’ strategies for managing supply chains and working capital demands during the crisis. Close to 60 per cent of those surveyed reported that switching suppliers or adding new suppliers had been an ‘effective’ approach to ensure the sustainability of their supply chain in a time where many manufacturers were either shutting down production due to regional lockdown measures or going out of business entirely.
Reducing workforce or ensuring workers were on more ‘flexible’ contracts were deemed as ‘effective’ measures by around 45 per cent of respondents and ‘extremely effective’ by 38 per cent of those surveyed so far.
Companies have also made use of available relief funds from the government as well as tapping into liquidity sources from financial institutions, including overdrafts.
Increasing average inventory levels and outsourcing part of the production processes were also seen as ‘effective’ means of managing struggling supply chains, according to survey respondents.
“We see that companies are thinking about whether to take a ‘lean’ approach with low inventories – or an ‘agile’ one with a bit more back up. The trend is to move a little bit more towards ‘agile’. One of the main questions on their mind is how much inventory do we need to have,” says de Goeij.
The inventory question depends on the sector the company operates in, with the Covid-19 crisis leading to increased demand for certain products, while demand for other goods dropped as lockdown measures saw physical retail outlets close down and production lines grind to a halt.
The survey also suggested that there was also a growing interesting in the use of supply chain finance (SCF) programmes, such as reverse factoring and dynamic discounting, to better manage working capital and invoice payments. These financing tools can be a way of providing liquidity to suppliers while also helping buyers maintain adequate working capital levels.
Around 20 per cent of those surveyed in the research so far already use SCF programmes, either offered by their buyers or by them to their suppliers.
The research also reveals a number of companies, ranging from 3 to 7 per cent of those surveyed to-date, depending on the specific programme, that say they have adopted or started to use an SCF programme during the crisis as a mean of tackling its negative effects.
However, the potential for further growth for SCF products within Europe remains, with between 60 and 75 per cent of those surveyed still reporting they do not have any type of SCF solution in place, the survey finds.
The data collection phase of this research should be completed during the summer, Gelsomino says, and then in-depth data analysis will commence.
“We want to provide insights to companies on what to do when a new crisis comes, because a new crisis will come in the next 5 years. How do we prepare for that?” asks de Goeij.
Companies across Europe are invited to participate in the research, and the Community aims to offer participating companies a benchmarking report that will enable them to compare themselves and their supply chain management strategies during the Covid-19 crisis against their peers.
Do you wish to get more detailed results? Fill in the survey yourself at this link and you will receive a detailed report!