Is the balance of power in buyer-seller relationships finally shifting in favor of upstream suppliers? 

In 2021, buyers were definitely in the driver’s seat. That year saw them wielding unprecedented power over their suppliers, as they maximized working capital by managing inventories more efficiently, collecting from customers more quickly and, most notably, slow-paying vendors.

In 2022, however, buyers “may have reached the upper limits of payment terms extensions,” according to The Hackett Group, which recently issued the latest update of its Working Capital Survey, for the second quarter of this year.

Hackett is calling it “The Great Working Capital Reset,” and for good reason. Comparing the performance of the 1,000 largest non-financial companies in the U.S. between the second quarters of 2021 and 2022, the firm reported a 1.1% drop in days payable outstanding (DPO), from 56.5 to 55.9 days. That followed two quarters of slowing growth in DPO. 

“This is the true definition of an inflection point, and a trend that is likely to continue,” said Hackett Group director Shawn Townsend upon the survey’s release. He said the shift of leverage toward sellers was the result of supply chain bottlenecks, rising inflation and geopolitical risks, all in the wake of the COVID-19 pandemic.

“Buyers have become more concerned with supply assurance, and have had to become less prescriptive about how they receive goods and services,” Townsend continued. “In addition, while supply chain financing remains popular, buyers are more focused on using it to stabilize and reinforce the supply base than to extend payment terms.” 

One of the options offered to suppliers at the height of buyers’ power was to accept a discount off the invoice in exchange for early payment. Third parties were also stepping in to pay suppliers sooner, in exchange for a cut of the proceeds. Those techniques continue, but there’s more of a chance today that sellers will be compensated in full for their products and services.

Inventory performance improved at the same time, according to the Hackett survey, with days inventory optimization (DIO) remaining virtually flat at 46.5 days, an increase of just 0.1%. That’s despite a move by some companies to build up buffer stocks to counter future supply disruptions. Still, said Thompson, companies continue to struggle with uncertain demand and supply, “and holding the line on inventory in this environment is actually a big win.”

Days sales outstanding (DSO), the third major measure of working capital performance, was also essentially flat in the second quarter, falling by just 0.1% to 40.1 days. Together the three working capital elements resulted in a 2% increase in companies’ cash conversion cycle (CCC), Hackett said. 

Hackett Group director Istvan Bodo says the trend toward speedier payment provides sellers with the leverage “to push back” on buyers and say, “I will be able to provide goods and services on time, but now I would like you to pay me in a shorter period of time.”

It wasn’t just the pandemic that empowered buyers. They’ve been increasingly calling the shots over the last 10 years, stretching out payment terms to hoard working capital at suppliers’ expense. But COVID-19 brought about a new awareness of the fragility of upstream supply chains, and the value of having trusted suppliers in place that can deliver reliably and punctually.

On the inventory side, it comes as something of a surprise that companies were able to keep levels down in the second quarter of 2022, given their recent disaffection with the just-in-time delivery model for minimizing standing inventory. But it’s more than a matter of how much stock is sitting in warehouses, Bodo says. Good inventory management also comes from obtaining a better understanding of demand, by having in place a strong integrated business planning process that can capture demand signals accurately and on time, then enable the sharing of that intelligence across the organization.

In the months ahead, buyers may yet find themselves grappling with new challenges as they absorb ever-higher prices for goods, services and labor in a time of rising inflation. Bobo notes that there’s a lag before such expenses show up on the profit-and-loss statement. “It takes time to see what happened, and learn lessons from it,” he says. And despite recent signs of a slowdown in inflation, companies will continue to grapple with higher costs and demand uncertainty in the foreseeable future.

There is, of course, the additional threat of a recession in 2023, which could further impact the buyer-supplier relationship. If that were to happen, “suppliers would definitely tighten their credit terms,” Bobo says.

Companies need to be prepared for such a scenario. To minimize risk, “it is highly recommended to have a good handle on whom you are selling to and what the credit terms are,” Bodo says.

Said Townsend at the release of the latest Hackett Working Capital Survey: “Headwinds will clearly continue to persist for the foreseeable future, and discipline, planning and foresight when it comes to working capital management can play a key role in helping companies succeed.”