Who Pays Best

Mike Troy
Editorial Director
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When retailers and suppliers talk about partnership and collaboration the focus tends to be on two areas: merchandising and marketing initiatives that drive sales or operational matters of making sure products are in the right place at the right time. Overlooked in these conversations is how and when retailers make — or don't make — payments to their trading partners.

Rudolf Leuschner

Retailer payment practices can vary widely and though suppliers seldom discuss the issue publicly they are quick to fume privately about terms, fees, chargebacks and invoicing practices. To explore what is arguably the most important aspect of a retailer and supplier relationship, two professors with the Center for Market Advantage at Rutgers Business School surveyed 630 supplier company representatives knowledgeable about the procurement and payment practices of their retailing clients. The first-of-its-kind study was conducted by Rudolf Leuschner, an assistant professor in the Rutgers department of supply chain management, and Sengun (Shen) Yeniyurt, an associate professor in the university's marketing department. The pair created a payment practices satisfaction index by exploring seven key areas with survey participants asked to assign a ranking of one to five based on their level of satisfaction with seven payment practices metric that included:

  • Length of payment terms.
  • Track record, or history, of on-time payments.
  • Invoice adjustments such as reserves, charges and holds.
  • Visibility of approved invoices.
  • Payment dispute resolution.
  • Offering of alternative funding options.
  • Overall satisfaction with retailer's payment process.

The study sought to examine the 50 largest U.S. retailers, however four retailers were excluded (Seven Eleven, Health Mart Systems, L Brands and Bi-Lo) from the ranking because the researchers were unable to obtain an adequate number of supplier responses.

Retailer payment practices can vary widely and though suppliers seldom discuss the issue publicly they are quick to fume privately about terms, fees, chargebacks and invoicing practices.

Sengun Yeniyurt

According to Leuschner and Yeniyurt, it has become increasingly common in several industries to increase the length of the payment terms. Traditionally, the norm was 2/10 net 30, meaning the full payment was due 30 days after receipt of the invoice, with a two percent early-pay discount for payments within 10 days. Now, some companies have extended terms to as long as 120 days, according to the researchers.

"Within the retail industry we see a shift towards longer payment terms, although there are still a number of retailers paying in 30 or 45 days. This lengthening of the payment terms has obvious advantages for buyers as it expands accounts payables and increases cash on hand. However, it can put great stress on suppliers if not managed carefully," according to the study. "Additionally, some large firms are working on shortening the accounts receivable cycle. They tend to do this at the same time that buying firms are working to extend their payables, which creates tension between the buying firms and their suppliers."

According to Leuschner and Yeniyurt, payment practices in the retail industry are a big deal with huge implications for suppliers. As large retailers are streamlining their supply chains, their suppliers have increased difficulty in financing their operations. This difficulty of obtaining funding can have severe implications on profitability, cash flow, and working capital, with cash flow difficulties even leading to bankruptcies and supply disruptions, according to the study's authors.

"Until recently, the field of supply chain management was primarily concerned with sourcing, making, and delivering. Nowadays, for many firms, maintaining a strong cash flow is big challenge and funding is a priority," according to the study. "Thus, firms are looking to their supply base beyond sourcing partnerships, towards funding."

Supplier Satisfaction Scorecard
Retailers' Payment Practices Ranked on Scale of 0 to 100

SOURCE: Center for Market Advantage at Rutgers Business School

The study describes a scenario where expectations to carefully manage cash flows means senior managers are increasingly focused on working capital management even as small and medium sized enterprises and non-investment grade firms find it difficult to finance their working capital requirements. However, small and medium sized firms constitute a large portion of the supply base for larger retailers.

"Although large companies generally have investment grade ratings, enjoy easier access to capital and get more favorable financial terms, they still find the idea of raising additional capital by utilizing their supply chains very attractive," according to the study.

Leuschner is the founding Co-Director of Rutgers Master of Supply Chain Management program and the curriculum coordinator for the MBA program at Rutgers Business School. Yeniyurt also serves as the founding Co-Editor-in-Chief of Rutgers Business Review.