Late Payments in Manufacturing: Insights into the Industry's Latest Challenges

Long before extended payment terms became prevalent, late payments were described by Supply Chain Dive as a form of ‘financial bullying,’ often employed by large retailers and businesses. This tactic can severely impact suppliers which lack the financial cushion to weather cash flow crises effectively, quickly creating complex challenges that permeate supply chain operations, affecting cash flow and credit resilience.

Unsurprisingly, SMEs lack the extensive financial reserves that larger companies possess to navigate such problems and find themselves accepting extended payment terms, forcing them to revise budgets and seek additional financing to bridge financial gaps.

Late payments have surged at a time when prompt cash flow is more crucial than ever. According to research by CPA, there has been a staggering 209% increase in late payments since the onset of the COVID-19 pandemic in 2022.

Late payments have been exacerbated by broader economic conditions. The pandemic, a worsening economic climate, and a rising cost-of-living crisis have inflated everyday expenses. Amid these pressures and the threat of a global recession, businesses worldwide are facing a growing late payment crisis.

Covid cash flow crisis

Stragetic late payments

According to research published in Chicago Booth Review, many large businesses strategically choose which suppliers to pay late and for how long. Typically, companies prioritise timely payments to larger, more critical suppliers while delaying payments to less essential suppliers. This practice is prevalent among businesses with significant market share and industry influence.

The decision-making process behind late payments is structured to maintain and strengthen relationships with key suppliers, ensuring the smooth operation of business activities. By prioritising payments to crucial suppliers, businesses aim to uphold operational efficiency and manage their cash flow effectively.

This strategic cost-shifting tactic allows businesses to temporarily alleviate financial gaps by withholding payments from upstream suppliers while awaiting payments from downstream customers. This approach helps them manage their working capital more efficiently during uncertain economic periods by temporarily plugging financial gaps.

In 2024, the 'Good Business Pays' Slow Payment Watchlist highlighted major retailers like Coca-Cola and Ab InBev for significantly delaying payments, some exceeding 100 days. Parent companies such as Reckitt, maker of Air-Wick, and Mondelez, owner of Cadbury, were also noted for delaying payments up to 126 days and 99 days, respectively.

Rising costs and geopolitical tensions

Many manufacturers are facing a convergence of challenges stemming from rising overheads, late payments from customers, and geopolitical tensions beyond their control, plunging numerous businesses into financial turmoil.

Since the end of the Cold War, supply chains have evolved into complex global networks spanning borders, languages, and time zones. This expansion has allowed manufacturers to optimize costs by sourcing from cheaper suppliers and utilizing efficient logistics. Enabled by low-cost sourcing, manufacturers enjoyed a period of significant growth that enabled them to thrive and compete on a global scale.

However, this interconnected web is vulnerable to risk. It relies heavily on geopolitical stability and low trade barriers. Recent geopolitical tensions, such as Russia's actions in Ukraine have disrupted global stability, with governments quick to react with a wave of sanctions and trade restrictions that have isolated Russia economically, impacting global supply chains.

Similarly, allegations of forced labour practices in China have prompted protective measures and trade bans from several trading partners, forcing manufacturers to seek alternative sourcing to protect their reputations and comply with human rights standards.

Moreover, disruptions in major trade corridors have compounded challenges. Issues like the Panama Canal draught where the government restricted capacity to 24 daily slots and conflicts in the Red Sea as retaliation to the Israel-Hamas war have diverted shipping routes and increased shipping costs and delivery times dramatically.

These crises have far-reaching implications, not only for the shipping industry but also for the environment and the global economy. The longer routes that the ships are required to take due to the Red Sea and Panama Canal crisis have significantly increased the distances for cargo and freight vessels by up to 53% according to research by World Bank, causing a steep rise in CO2 emissions. From an economic perspective, it has led to increased shipping, handling and insurance rates, fuelling global inflation and hampering regional and international shipping economies.

Continuous monitoring for long-term financial health

As the saying goes, prevention is better than cure, and this holds especially true for avoiding late payments. The post-pandemic world is rife with unfair trade practices and payment policies that favour market monopolists. To stay resilient, businesses are now adopting more robust and stringent credit control frameworks to build resilience against rising late payments.

These frameworks enabled by technology include the continuous monitoring of customer information. This proactive approach to risk ensures businesses stay ahead of potential changes in their client's financial health, allowing for timely interventions, reducing the risk of late payments, and strengthening cash flow resilience.