Supply Chain and Payment Practices

Publication type: Business ethics briefing
06 November 2013

Tags: Pay, Suppliers

This briefing explores the three issues involving supplier payments. It then looks at governmental attempts to curb the problems and how companies are addressing the issue.

Speed read

The UK Government has declared it is ‘going to war’ on the issue of ‘late payments'. This refers to the situation that occurs when organisations exert power over their smaller suppliers and either pay late, change payment terms or demand unreasonably long payment terms from the outset. These actions can have the consequence of leaving SMEs with cash-flow problems but


little room for bargaining through fear they will lose the business.


This is what makes such behaviour an ethical matter.

In January 2013 the government declared it was ‘going to war’ on the issue of ‘late payments’.1 This refers to the situation that occurs when organisations exert power over their smaller suppliers and either:

  • Pay late,
  • Demand unreasonably long payment terms from the outset, or
  • Lengthen the terms part-way through the contract.

These actions can have the consequence of leaving SMEs with cash-flow problems but


little room for bargaining through fear they will lose the business.2


This is what makes such behaviour an ethical matter. The customer/supplier relationship is a key aspect of business success and, in ethical terms, should be based on mutual benefit, respect and fairness. The balance of this relationship is upset when companies cross the line between mutually beneficial negotiation over contractual terms and aggressively assert their power over smaller, weaker suppliers. They are behaving in what may be described as a bullying fashion and are not acting fairly.

James Jones, the former Bishop of Liverpool and the chair of Waitrose's new corporate social responsibility advisory panel states that


a responsible company should have an ethos that you treat your staff fairly ... it should be mutual respect and that should extend to suppliers.3


Late Payments

According to the financial transaction specialists BACS, recent research indicates that the average small business (SME) was owed £31,000 in overdue payments in April 2013. This amounted to over £30bn across the UK economy and the average overdue payment was 38 days late. The 2013 All Party Inquiry into late payments in SMEs heard how, in 2008 it was estimated that over 4000 SMEs went out of business due to their customers failing to pay on time.4

Finance company ‘Market Invoice’, which specialises in helping SMEs access funds owed to them through invoices, claim to have trading statistics showing that many of the FTSE 250 companies are paying their suppliers as late as 30 days after officially signed terms.5 In addition to being unfair, paying late can become a legal issue if the customer does not pay the supplier within the period of time agreed in the contract. Interest and compensation is legally payable when late payment occurs but small businesses are reluctant to use this legislation for fear of losing contracts with bigger businesses on which they are often reliant.


Long Payment Terms

In 2011 Philip King, chief executive of the Institute of Credit Management, noted


long payment terms, agreed by suppliers, are ... a growing problem.6


Mr King has questioned why suppliers agree to long payment terms if they are unreasonable and do not work in their interest. However, the Forum of Private Business (FPB) argues that smaller suppliers feel they do not have any option against powerful customers who ‘dictate payment terms’.7 Business and Enterprise Minister Michael Fallon believes that, since the financial crisis, payment terms have been extended by many companies and in early 2013 he was aware of one well-known company that had a payment process approaching 200 days.8


Changing Payment Terms

Cases of large companies amending their payment terms after a contract is agreed frequently make the news. Without knowing the exact agreement between customer and supplier, it is not always clear whether such action is genuinely unfair. However, in 2008, Tesco faced public criticism for asking all its non-food suppliers to wait an extra 30 days for payment as it sought to free up cash for the Christmas trading period.9 In October 2012 supermarket Sainsbury's was chastised by the FPB for having increased all non-food supplier payment times from 30 to 75 days. This prompted Andrew Downes from the Forum of Private Business to state that


no right-thinking person could justify what Sainsbury's is proposing – a 150 per cent increase in the time it takes them to pay a supplier for goods provided – as being fair and decent.10


Sainsbury’s joined Dell, Argos, and Carlsberg, who all increased supplier payment times retrospectively.


Solutions to the Problems

Campaigners like the FPB are concerned that there is a European-wide business culture of late payment that is damaging SMEs.11 In the UK, a government initiative has been set up to attempt to change this. In 2012, Michael Fallon wrote to all companies listed on the FTSE 100 and FTSE 250 share indices to encourage them to sign up to the voluntary Prompt Payment Code (PPC). Signatories to the Code commit to paying their suppliers within clearly defined terms, and also to ensuring there is a proper process for dealing with any issues that may arise. Those who refused to sign were threatened by Fallon with being ‘named and shamed’ in January 2013.

By March 2013 Philip King observed that there had been a noticeable shift in businesses' response to the issue of payments:


Political and media pressure have no doubt helped to bring the late payment debate out into the open.12


The code was deemed to be improving the situation with independent analysis by Experian suggesting that current signatories represent over 60% of total UK supply chain value.13

However, by August 2013 less than half of FTSE 350 companies had signed up, with just 71 from the FTSE 250 and 72 from the FTSE 100.14 Additionally, the Federation of Small Business (FSB) claims some signatories to the code are not changing their unfair behaviour.15


Supply Chain Finance

Another action being taken is the government-supported supply chain finance initiative. This


allows big businesses to notify a bank as soon as a supplier’s invoice has been approved. The bank, armed with the assurance the bill will be paid, will then extend a full, immediate advance of the bill to the supplier at a low interest rate.16


Dubbed by the Prime Minister as a 'win-win' for customers and suppliers alike, the scheme has caused concern amongst some SMEs that it will disadvantage any suppliers not included in the initiative. One major sector where companies have adopted payment policies in line with the scheme is the construction industry with Carillion being one of the first to do so. Although they have faced criticism from the National Specialist Contractors Council over some of their interpretations of the government scheme, (according to a survey carried out by Carillion) almost 90 per cent of its suppliers surveyed agreed that it had had a positive effect on their ability to access payments promptly and at a time of their choosing.17


European-wide Action

An EU directive setting 60 days as the maximum payment term between businesses took effect in 2013. This can be over-ridden if supplier and customer agree otherwise and the new terms are not "grossly unfair" to the creditor.18 ‘Market Invoice’ state that large companies often enforce 90-120 day payment terms e.g. Monsoon, Accessorize (90 days) and GlaxoSmithKline (95 days).


Relations with suppliers in company codes of ethics

IBE’s research into this area suggests that large companies recognise that a well-managed supply chain is important to company success and offers mutual business benefit. However, findings also suggest that they lack the processes, leadership and incentive frameworks to translate these beliefs into action.19

Although still relatively uncommon, some businesses are showing their commitment to fair payment practices to suppliers by publishing their position within the company’s code of ethics (or equivalent). For instance:


We ... are also a signatory to the Prompt Payment Code which requires us to provide clear guidance on payment procedures and encourage similar good practice amongst our suppliers.

Lloyds Bank


We settle our bills promptly, being a signatory to the Prompt Payment Code.

Associated British Foods


We pay suppliers in a timely manner and according to our agreed terms of trade.

Severn Trent


Training for employees on what the company procedure is around supplier payments is essential if they are to behave in line with the company’s policy.


The future: more legislation in the pipeline?

On October 14th 2013, the Prime Minister announced a consultation aimed at helping small businesses to be paid on time and declaring that


more needs to be done to build a business culture across all sectors of the economy that sees the fair, prompt and reliable payment of suppliers become a core corporate responsibility.20


The consultation will consider appropriate penalties for late payments. Given the UK government's interest in this topic, it seems possible that if practical ways to improve payment culture are not found, then further legislation is likely. Certainly SMEs are supportive of more legislation: Jon Priest, CEO of market research firm SPA Future Thinking, sums up the feeling:


It's so massively unfair that I feel there should be legislative guidelines put in place. Small businesses have been held to account by the corporate Goliaths for far too long and I, for one, want to see an end to it.21

1 The Telegraph (05/01/2013) ‘Government 'going to war' over £37bn late payments to small companies’.

2 Andrew Downes from the Forum of Private Business quoted in (22/10/2012) ‘Sainsbury's shamed for increasing supplier payment terms’.

3 The Guardian (07/10/2013) ‘The strong correlation between fair leadership and inspiring change’.

4 Debbie Abrahams MP (07/2013) 'The Report from the All-Party Inquiry into Late Payments in Small and Medium-sized Entreprises'.

5 MarketInvoice Article 27 How to deal with late payment.

6 Quoted in The Telegraph (11/12/2011) ‘Farmers, small business urge end to late payment culture’.

7 Forum of Private Business Late Payment.

8 Ibid fn 1.

9 Retail Week (27/10/2008) ‘Tesco extends non-food supplier payment terms’.

10 Forum of Private Business (19/10/2012) 'Sainsbury's enters the Forum's Hall of Shame after extending payment times by 150%'.

11 European Commission Press release (12/03/2013) 'SMEs: Damaging late payment culture due to end on 16 March'.

12 Institute of Credit Management (04/03/2013) ‘New figures from ICM show shift in late payment culture’.

13 As of October 2013.

14 The Financial Times (11/08/2013) ‘Vince Cable looks at slapping levy on late payers’.

15 BBC (13/10/2013) ‘Scheme to ensure payments to small companies 'not working'’.

16 The Telegraph (26/10/2013) ‘Payment concerns over supply-chain finance move’.

17 Construction News (05/09/2013) ‘More major contractors consider following Carillion's lead on early payment facilities’.

18 Department for Business Innovation and Skills (03/2013) Directive 2011/7/EU On Combating Late Payment In Commercial Transactions.

19 From IBE research done in conjunction with the Department for Business Innovation and Skills, Summer 2013.

20 Quoted in Supply Management (14/10/2013) ‘PM pledges action on late payment’.

21 Quoted in The Guardian (18/09/2013) ‘How can small businesses take the pain out of late payments?