Supply Chain Activities Which Affect Accounts Payable (A/P)

Supply chain activities which affect A/P include:

 Negotiated Payment Terms – See statement in A/R section.

Labor costs – If these costs rise, business may “postpone” paying suppliers in order to have sufficient cash to pay later.  This could affect the relationship with suppliers; suppliers can withdraw trade credit due to untimely payment, which could greatly increase the need for working capital and could degradate the C2C as well as a solvency crisis.  If suppliers accommodate the longer payment period, then the C2C is improved.

Manufacturing costs – The same effects would occur as described with labor costs.

Sales Growth – See statement in A/R section.

Float – Float management involves controlling the collection and disbursement of cash.  The objective in cash collection is to speed up collections and reduce the lag between the time customers pay their bills and the time cash becomes available.  This directly affect by supply chain processes.  In many cases exchange of payment will not occur until items deliver to their end destination or a customer receives rendered services.  Any delays in the supply chain process of receiving products or rendering services will result in delays in “settlement” (a term used to denote when customer service needs are rendered and payment is transacted and satisfied).  Delays will drive up costs and hurt goodwill, which can result in decreased future revenues.

Lack of automation – This relates to float.  Automation speeds up transaction times and minimizes delay, which reduces costs.

Tight W/C availability – When the business is not collecting it’s A/R according to it s payment policies, inventory is not moving appropriately and expenses are increasing, business get into a “cash crunch” which requires more borrowing.  There are increased costs from borrowing and increased opportunity costs due to alternate investment opportunities for the cash tied up in A/R and inventory.  Supply chain processes can help free up cash from these current assets, which will reduce costs and create more “free cash flow”.  Free cash flow is a term used to denote cash remaining and available after operational, debt, and equity requirements of the owners are met.  Free cash flow is used to purchase more capital equipment and invest in new products and business opportunities for the firm.  Free cash flow is also an indicator of financial health and viability, and those firms with more free cash flow have increases in the stock price and greater enterprise value, which is the projected price or worth of a firm.

Unprofitable Operations – Unprofitable operations tend to cause a business to increase its leverage or debt in relation to its equity, which increases its credit risk and drive up its cost of credit.  Unprofitable operations could be a possible sign that the business and its supply chain are not meeting customer expectations.  Unprofitable operations could also mean that there has been a shift in the market characteristics in a product or service, and the business and supply chain strategy must adjust to the change in the market.  

Unplanned Purchases – Unplanned purchases or “maverick spend” affect company cash, increase costs and undermine supply chain relationships.

Tax Liabilities and strategies – Cheaper labor and taxes influence site selection by firms to locate facilities in foreign countries.  These new facility locations have created additional supply chain costs, due to increased inventory in transit, increased transportation costs, increased supply chain risk and increased landed costs.

Cyclicality – See statement in A/R section.

Seasonality – See statement in A/R section.