Sunday 21 June 2009

Prompt Payment Code - the great misnomer!

News that Primark have joined Asda, Tesco and John Lewis in signing up to the Prompt Payment Code misses the essential point of the current use of supplier credit as a free source of Working Capital by the major multiples. Apparently Sainsburys, Morrisons and Boots all appear to agree with the code, but are considering their options…
As you know, the prompt payment code specifies that retailers should pay their suppliers within the credit period agreed between the two parties.
Any business failing to pay within terms agreed with suppliers would be in breach of the code and would risk being struck from the list….a good idea going nowhere!

How about Fair Payment Code?
In the fast-moving UK grocery & nonfood industries, with daily deliveries and average supplier credit-periods of 30 days, and H&B/Non-foods reaching 90 days, 'prompt' is hardly an accurate description of current payment periods.
More importantly, a supplier in financial difficulties neither has the muscle to negotiate earlier payments, nor can afford to offer sufficient settlement terms to encourage a reduction in days' credit. Besides, in most circumstances, a supplier will still be reluctant to risk reporting a major customer for breaches of the code.

If the government really wants to bring about change, it needs to appreciate that credit period given by suppliers was originally intended to help a customer bridge the gap between receipt of the goods and payment by the shopper. In the current UK market, with stockturns averaging 25 times per annum, but in some categories turning daily, or at least twice per week, surely payment period should be related to delivery frequency?

In practice this means that fresh produce delivered daily, should be paid for within 5 days, allowing for 'efficiencies' of the current Banking system?
Non-foods, delivered weekly, should perhaps be paid for within 10 days of receipt.

Relating credit period to delivery frequency would reward efficiencies on each side, and would shift the emphasis off free credit as a source of working capital. It would also remove much of the political sensitivity attached to potential charges of abuse of power by the major multiples...

(For those who need it spelling out, which major multiples do you think will get the blame for all the supplier bankruptcies arising from the current recession, as the government and the public cast about for a scapegoat in the coming months…?)

However, simply imposing a category-based credit period, and legislating to reduce to those levels is not the answer.

Current credit periods have developed over time and represent an agreed balance between supply and payment between two business partners. A one-sided reduction of the credit period would be unfair to the retailer.
What has to happen is for each party to agree the financial advantage represented by the current credit-period and calculate the loss to the retailer represented by paying faster.
This loss could then be restored via other parts of the supplier-retailer package, thus maintaining a fair-share trading relationship.

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