Pardon me if I talk about business for a moment, but I am a professional accountant too:
Perhaps I am old-fashioned, but it bothers me that more and more large corporations have turned from efficient and dynamic competitors into mean-spirited bullies. It first struck me when a former employer was acquired by one of the largest companies in America. I was not too surprised when I discovered that their employee relations were horrible. I was reminded of an old DILBERT comic where the boss comes in and says “Yo headcount!” to the workers.
What did surprise me was their relationship with suppliers. I was trained to see the supplier, company, and customer were all part of a supply chain, and as in any chain, each link must do its part. Each link treats the others fairly, knowing that the success of the chain relies on all of our successes. If a company wants to exceed their expectations, they focus on what is inside their organization to optimize performance. I read an excellent story about DELL Computer a few years ago. While they maintained normal supplier payment terms (let’s say Net 30), they restructured their own organization so that they could deliver systems in much less than that, thereby helping to fund their business with the suppliers’ money. It was okay with the suppliers though since they were still getting paid within their normal terms.
It would seem many of our largest corporate titans have decided that is not enough. Given their size and volume, they could go back to their suppliers (the smaller ones) and demand extended terms (Net 60 up to Net 180). Perhaps a new supplier could walk away from such a deal, since it was new business, but think about a small supplier who relied on that business for years to make a profit. Suddenly, a major corporation (potentially with billions in the bank) is demanding concessions to keep the business. In essence, we have a big corporation demanding money from a smaller one, or else. That sounds like a bully to me.
An interesting question is “why?” The worst answer is, “We’re big and we can do whatever we want to!” While it is true that corporate executives have big egos, I doubt that is the entire reason. From being inside the belly of the beast more than once, I know it is often because they are the opposite of the DELL example above. It could be more related to: swollen bureaucracies, massive and varied product portfolios, and mid-level managers who are not as smart as they think they are. The thrill of the acquisition game has left them bloated and too unwieldy to manage. Layers of management are sliced out, but the cumbersome bloat will not go away. Eventually, the previous managers are replaced by even worse neophytes.
Unfortunately, the market is a cruel mistress. The next 10-Q is due soon, and something has to be done to make the numbers look better. And then those fateful words are spoken, “Let the suppliers pay for it! The ratios will look better in a few weeks!”
Are you invested in Blue Chip Bullies? Do you care? If you own a small business or know someone who does, you probably do. Finding out if your portfolio darling is a bully is not simple, unless you are an insider. You could e-mail their CFO or Shareholder Relations group and ask what their supplier payment terms are. If you choose to look at their ratios on their financial statements, please be careful. If a company is B2C, the ratios probably will not help. Unless they finance their customers, they likely turnover their receivables very fast, while supplier payments are generally on terms. In a predominantly B2B scenario, the numbers are more meaningful since both receivables and payables are on terms. The dead-ringer for me was my former company having higher payables than receivables in a B2B business. Payables excludes payroll, and they had a ton of employees. The total value of their sales went into receivables.
The final question is again, “Do you care?”
If you believe a company should do whatever it can, without regard to their supply chain, you should care. In that case, the question is, “Are they taking enough advantage of their suppliers?”
If you relish the days when business was tough but fair, you definitely care. The bullies should not rule our schools or our marketplace. Look at the companies in your portfolio. If it looks bad, ask them first. Maybe they have a special situation or a significant B2C segment. If you do not like their answer, you get to decide where you put your money.