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Focus: Sourcing/Procurement

Feature Article from Our Sourcing and Procurement Subject Area - See All

From SCDigest's On-Target e-Magazine

- Aug. 14, 2014 -

 
Supply Chain News: Payments to Vendors Rose Slightly in 2013

 

Despite Reports that Companies are Extending Payment Terms to Suppliers, Modest Rise in DPO in 2013, and Metric is Surprisingly Down over Last 10 Years

 

SDigest Editorial Staff 

 

Of the three primary components of working capital performance, the payables area is perhaps the most problematic.

SCDigest Says:

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Companies with higher gross or net profits margins should have a lower percentage of payables per dollar of sales than companies with lower margins.

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Precise definitions vary a bit, but in general the three areas that impact working capital changes are:

• How fast a company collects cash from its customers (accounts receivable)

How much inventory a company holds

How fast (or slow) a company pays its suppliers (accounts payable)

The reason why the latter element is somewhat controversial is that to make improvements to working capital (and therefore cash flow), a company has to stretch out payments to suppliers, which is great for a company's own metrics but comes at the expense of its suppliers' own cash flows and financial metrics.

For the past several years, SCDigest has performed analysis on the working capital data for the 1000 largest US companies compiled by REL, a Hackett Group company. We focus on the inventory component (see Inventory Performance 2013), but for the second time will also look at the payables trends as well. The data for the 2014 report is for the 2013 financial year.

It is especially interesting to see the 2013 numbers in the context of continuing reports that a number of companies, especially in the consumer products sector, are significantly extending payment terms for suppliers.

 

REL Finds Days Payable Outstanding Rose Just a Bit Year over Year

Relative to payables, REL measures that metric in terms of Days Payables Outstanding (DPO), which measures how many day's worth of sales a company has in terms of payables. REL defines DPO as:

 

      Year-End Accounts Payable /(Total Revenue/365)

That means an increase in DPO is an improvement, and a decrease a deterioration. For working capital and cash flow purposes, stretching out supplier payments is a good thing, regardless of the "business ethics" questions that could arise.



(Sourcing and Procurement Article Continues Below)

 

CATEGORY SPONSOR: SOFTEON

Learn More about Softeon's Innovative Supply Chain Solutions

 

 

Despite the seeming trends in the consumer packaged goods sector discussed above, REL found that DPO was actually up just slightly in among across the 1000 public companies it follows, coming in at 32 days, up just a smidgen from 31.8 days in 2012.

 

In fact, somewhat surprising to SCDigest, average DPO was actually decreasing steadily from 2002 through 2008 and the start of the recession, falling over that time from 35.5 days to just 28.2. It then started to go the other direction after the great recession before flattening out the past three years, at levels still a more than a day shy of where this metric was in 2002.

 

 

 

Source: REL



How does that square with reports of vendors greatly lengthening their payment terms? We're not quite sure.

While SCDigest loves the REL working capital data, we will note DPO is a unique and difficult metric, as suppliers facing extended payment terms are likely to raise prices to compensate for the late payments, mitigating the cash flow advantages from the longer terms.

Below is a table of DPO results in 2013 and 2012 by sector, based on SCDigest's efforts to recategorize the REL data into better sector groups. It is sorted by the sectors with the highest DPO, meaning they stretch out overall payments the longest, to those with the lowest DPO.

 

DPO by Sector 2013 and 2012

 

Sector DIO 2013 Change 2012 to 2013 DIO  2012
Retail - Auto/Truck Parts
              82.36
6%
           77.86
Contract Manufacturers
              55.70
5%
           53.10
Retail - On-Line
              50.80
-7%
           54.70
Wholesale - Electronics
              48.09
2%
           47.11
Auto Parts/Components
              46.41
4%
           44.44
Construction Equipment
              43.41
0%
           43.56
Auto. Truck Related OEMs
              42.46
-51%
           86.27
Electronics Distributors 
              40.51
5%
           38.63
Wholesale  - Pharma/Medical 
              39.84
4%
           38.22
Computers and Peripherals
              39.18
-7%
           42.02
Business Supplies
              37.50
2%
           36.72
Containers and Packaging
              37.44
9%
           34.23
Retail - Office Products
              37.34
15%
           32.38
Retail - Electronics
              36.42
9%
           33.31
Electrical Equipment
              34.78
0%
           34.85
Building Products
              34.57
4%
           33.08
Electric Utilities
              34.28
-3%
           35.19
Household Durables
              33.67
6%
           31.68
Machinery
              33.58
0%
           33.54
Consumer Package Goods
              32.50
4%
           31.33
Chemicals and Gases
              32.37
2%
           31.62
Personal Care Products
              31.21
15%
           27.16
Industrial Conglomerates
              30.73
2%
           30.05
Pharmaceuticals
              30.40
10%
           27.71
Aerospace and Defense Components
              29.96
5%
           28.48
Office Furniture
              29.15
4%
           28.14
Retail - Mass Merchants, Dept. Stores, and Club Stores
              27.49
4%
           26.53
Apparel  and Shoe Manufacturers
              27.48
-6%
           29.11
Metals Manufacturing and Distribution
              27.21
7%
           25.35
Paper and Forest Products
              27.07
11%
           24.49
Semiconductors
              26.42
-2%
           26.98
Spirits
              26.32
8%
           24.40
Leisure Products
              26.18
1%
           25.93
Food Manufacturing
              25.82
2%
           25.42
Retail - Home Improvement
              25.80
3%
           24.96
Aerospace and Defense OEMs/Systems
              25.74
-8%
           27.88
Retail - Dept. Stores Only
              25.73
5%
           24.56
Beverages
              23.83
2%
           23.45
Retail - Other
              23.31
-5%
           24.66
Retail - Dollar  Stores
              23.19
4%
           22.29
Network and Communications Equipment
              23.17
4%
           22.32
Wholesale Distributors -Industrial and Electronics
              22.07
1%
           21.84
Retail - Apparel
              20.78
-3%
           21.51
Food Ingredients 
              20.60
-6%
           21.90
Wholesale - Food
              20.24
45%
           13.96
Semiconductor Equipment
              19.88
-2%
           20.22
Retail - Drug Stores
              19.77
3%
           19.10
Retail - Grocery
              19.58
0%
           19.52
Toys
              19.45
13%
           17.20
Life Sciences Tools and Services
              19.36
4.3%
           18.56
Construction Materials
              18.91
15%
           16.37
Biotechnology
              17.04
-19%
           21.12
Medical Devices
              16.30
-8%
           17.72
Airlines
              16.20
3%
           15.78
Retail - C-Stores
              10.97
31%
              8.35
Restaurants
              10.73
-9%
           11.73
Tobacco
                8.66
3%
              8.39

 

Source: SCDigest from REL Data

 

While the range of DPO across sectors is not surprisingly tighter than the extremely wide range of Days Inventory Outstanding, there are still some pretty significant differences. We will also note that differences across certain sectors or companies in overall business metrics could explain some difference in DPO, rather than coming from differences in payment practices.

 

For example, companies with higher gross or net profits margins should have a lower percentage of payables per dollar of sales than companies with lower margins.

 

Any reaction to these DPO numbers? Let us know your thoughts at the Feedback button (email) or section (web form) below.




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