Is Late Payment of Suppliers having a negative impact on Quality, HSE, Delivery, Innovation and overall supplier relations ?
The Oil & Gas industry is currently facing tough challenges following the fall in oil prices. With no expectations of a sustained price rebound to previous high levels, Exploration and Production (E&P) companies are being forced to re-evaluate major capex projects and implement long term cost reduction strategies that ultimately impact on their supply chain trading partners. Meanwhile Service Companies and many other suppliers are feeling the margin pressure passed down from E&P companies and are themselves engaged in implementing cost cutting initiatives that may or may not effect negatively on performance levels across Quality, Delivery, HSE, and Innovation.
In this article I want to focus on how delayed payment, withheld payment, or increases in agreed payment terms also impact on the relationship and ultimately on performance levels and the associated risks of poor performance.
If suppliers don’t get paid on time it not alone impacts their liquidity but if the practice continues over the longer terms ( as we see at present) it impacts the partnering aspect of the relationship. The increased financial pressure and soured relations can ultimately ripple down to effect performance levels either through shortcuts to improve margins, or less investment in Research and Development (R&D) , or even an overworked and strained supplier workforce where a focus on Job Quality and HSE is less important than efficiency and cost control.
Suppliers face a different struggle in an environment of low prices and associated working capital challenges. Contracts with E&P companies are often re-negotiated to reduce supply chain costs. With reduced profit margins, cash will be critical to maintaining liquidity until prices rise and improved contract rates return.
With cost cutting comes the associated reduction in staffing numbers, often with the remaining staff being asked to take on more and more tasks that were previously shared out. That in itself drives a culture of focusing on what it takes to just get by, rather than maintain and drive Performance improvements and innovation through investment in Research and Development (R&D)
Stretching out payment terms by even 5 days can have a multi billion dollar Industry impact on cashflows further down the supply chain, and it is felt somewhere. Yip even as some suppliers are lucky enough to be able to pass it down the chain, the 5 days stretch at some stage cannot be passed any further. It is within this economic setting that we find a drive to improve Liquidity on all fronts. As Days Sales Outstanding (DSO) continues to increase, and the norm of “payment per terms” disappears we must ask ourselves what are the other consequences that come into play which drag down further those high performance levels we all worked so hard in partnership to achieve in the preceding years.
Enter the Monkey
Add to that the frustration of calls from Global account Managers who instead of working proactively to improve service to the Operator are now actually weighing into the team effort to pressurize Operators to pay the overdue invoices. So a once great relationship is being put to the test on a monthly basis by the “Supplier Monkey on their Back”. Chasing down over due invoices takes time, costs money, and has an overall negative impact on the Operator / Supplier relationship.
The whole concept of trying to do the same with less and at the same time chase overdue monies comes into play. This moves the needle on the ‘Relationship Monitor’ from a collaborative partnering type of relationship reaping the rewards of innovation to a soured relationship with the stick pushing resources into an overstretched position. In this scenario the supplier must cut costs, to improve cashflow and margins, and Ultimately investment in Innovation is reduced or even disappears, Quality suffers, and Health and Safety risks increase. This is not always to be regarded as a fault with the supplier, but more often than not they are merely mitigating the risks by reducing costs associated with the decrease in margins and cashflow.
Supplier Performance Management Context
So if we look at the above in the context of supplier performance management initiatives its important to be able to correlate an outward movement on payment terms across a range of both leading and lagging indicators. Some of these indicators include metrics such as Number of Incidents, number of HSE Meetings Held, Number of Supplier Management Visits, Number of Innovations, Number of Quality issues. So when we do a correlation between these and payment related metrics such as Invoices beyond terms, Days Payables Outstanding, we should start to see a trend if the suppliers cost-cutting initiatives are impacting these negatively. From there we can put plans in place to redress the impact and ultimately reduce our risk exposure. If on the other hand you are not doing this exercise correlation across the metrics then you cant assess the impact to the same degree, and ultimately risks will materialize that it may be too late to mitigate.
Key Questions to ask yourself :
Questions that should be asked within all Oil & Gas companies, whether Operators or Service Companies, whether upstream midstream or downstream
- Do I know the true impact and cost of a 5 or 10 day outward move on payment terms on my supply chain ? On my Supplier’s Supply chain? Can they Survive it?
- Have I got the necessary means to check what is being impacted by such a move ( ie Correlating the terms change to performance level decreases in Quality and HSE and innovation.) ?
- What are the risks in doing this and how can we mitigate ?
- Can we recover the partnering type relationships we had before the adjustment in terms after the price of oil goes up and economic conditions improve again. Or Has the Monkey Killed the relationship?
In summary its very hard to avoid cost cutting, staff reductions , and terms adjustments to improve cash flows, and associated margins but when you do this make sure you have the dials, dashboards, radar in place to assess the impact on the risks to both your supply chain and the overall business relationship with your suppliers. At the end of the day you want them to make money to stay in business.
I hope you enjoyed the article and look forward to your comments, and to any experiences either as Operators or Suppliers you may have had that can offer further guidance to the Industry.
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About : Daryl Fullerton
Daryl is a Supplier Performance and Relationship Management Specialist at Outperform SRM. He provides guidance and consultancy on the design, development and Implementation of various Supplier Performance & Relationship Management Systems for Global Oil & Gas Operators and Service Companies across Upstream, Midstream and Downstream Sectors.
Specialism’s include Supplier Performance & Relationship Management, Supplier Risk Management, Supplier Enablement, Operational Risk Management, Contract Compliance Management, Scorecards, KPI’s, P2P Process Automation, PIDX Standards, and Management Information & Reporting Systems.
A keen promoter and believer of the importance and focus on his ‘partnering to solve approach‘ in improving Operator / Supplier Relations in 2015 Daryl was awarded the honor of “Supply Chain Pros to Know” in recognition of the leading supply chain professionals and experts worldwide.
About : OutPerform SRM
OutPerform SRM is a management consulting firm that helps leading Oil & Gas businesses establish value added solutions for effective Supplier Relationship Management (SRM). We help our clients reduce inefficiencies, reduce costs, and make lasting improvements within their Supplier Relationship Management (SRM), Supplier Performance Management (SPM), and many more important business critical Supply Chain Initiatives . Through our hands on experience with Major Oil and Gas Operators over the last 17 years we’ve now built a firm uniquely equipped to this task across all Major Category Lines.
Our Experts have Experience of working with a wide range of internal and external stakeholders with the ability to build relationship and influence outcomes. Our Experience of supplier performance management includes detailed knowledge of processes and frameworks including commercial performance management of contracts and knowledge of supplier risk management techniques.
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