A DECISION BY GENERAL MOTORS CO. TO speed up parts payments meets a grateful supply base of some 1,700 companies, but it likely will do little to stem a tide of bankruptcies expected to continue in the sector for some months.
“It's positive from the standpoint that anytime you get better payment predictability and earlier payments to level out cash flow, that is going to help a supplier's internal cash flow, as well as help their bankers better understand their cash flow and their business model,” says David Andrea, vice president-industry analysis and economics at the Original Equipment Suppliers Assn.
GM's new plan calls for its 1,400 direct-material and 300 logistics- and service-parts suppliers to move from a monthly payment schedule to a weekly slate beginning Nov. 1.
Under the old system, these suppliers were paid on the second day of the second month after GM received the part or service. That means a supplier shipping parts in the first week of July would not get paid until early September, when one payment would cover all goods shipped throughout July. The average wait was 47 days.
Under the new system, GM would pay a supplier Dec. 22 for a parts shipment received Nov. 1. A second shipment received Nov. 8 would get paid Dec. 29, and so on.
GM, which considers December its “transition month” for the new schedule, is focusing the program on North America but may roll it out globally.
“The reason to do this is because during our bankruptcy we needed to micro-manage our cash, and the big supplier payments every month of $1 billion, $2 billion would have a big impact on our cash flow,” says GM spokesman Dan Flores.
“This levels out our cash distribution, reduces our cash volatility (and) lowers our cash balance requirements,” Flores says. “With more suppliers getting paid more regularly, we hope they won't have to draw as often on their lines of credit.”
Under the old system, the supplier waiting to be paid would draw on credit from a bank to keep its operations going. Once the payment arrived, they repaid the bank.
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