When negotiating payment terms with suppliers, manufacturers must pay special attention to avoiding risk. A balanced supply contract ensures a mutually beneficial agreement between both parties, but if the language concerning payment isn’t exact, it could result in one side losing out, possibly even irreparable damage to the working relationship.
How can manufacturers properly mitigate risk when discussing payment terms with their suppliers?
1. Put mechanisms in place for delinquent or unmet deliveries
Obviously, when mapping out payment terms, suppliers will have a few conditions in place to handle late payments. In the same respect, manufacturers should make sure their interests are equally represented by chiseling out their own conditions for deliverables.
Think of it like a typical supplier escalation clause. Should the cost of materials increase, a supplier may invoke an escalation clause to raise the price of services rendered. Fair enough, but what if the supplier, for whatever reason, cannot meet the needs of the manufacturer?
Insufficient procurement may end up costing manufacturers significantly as they scramble to complete deficient work orders and pay top dollar for last-minute service. Manufacturers should actively address “worst case scenarios” with their partners, like who they’ll turn to if suppliers can’t fulfill their supply requirements, and how much the original supplier can expect to supplement that emergency investment.
“Flexible payment terms may even be preferable to lower prices.”
2. Don’t accept boilerplate payment windows
Suppliers may offer standard payment terms, or at least terms “standard” for their other contracted partners. Adjusting and extending the length of payment terms presents manufacturers with perhaps one of the greatest “parachutes” against risk: immediate cash flow increases.
According to Entrepreneur, flexible payment terms may even be preferable to lower prices, depending on the manufacturer’s situation.
Manufacturers might get less pushback from suppliers when they bring detailed reasons as to why certain payment windows adversely impact their operations. In fact, manufacturers could calculate cash flow estimates according to different payment windows as the groundwork for their arguments regarding extensions.
3. Discuss supplier pain points as well as your own
When two organizations partner, they effectively assume each other’s risks by way of mutual dependence. A degree of transparency between suppliers and manufacturers, therefore, could mitigate or eliminate problem areas for both parties. After all, with an extra set of eyes and hands – so to speak – both partners could find ways to restructure payment terms that attack these risks head on.
Beyond timing, there are two important factors worth highlighting concerning alternative frameworks for payment terms that partners could take advantage of. Pre-payment, for one, could be a show of good faith for suppliers unwilling to budge on lengthening invoice durations. Additionally, how manufacturers remunerate suppliers could be a bargaining chip as well. If suppliers have switched to an e-payment system but the manufacturer sticks with paying in check, manufacturers could agree to modernize if suppliers are willing to expand payment windows.