Boeing has announced its decision to extend payment terms from 30 to up to 120 days for its suppliers, as well as an intention to reduce its inventory hold, moving towards a just-in-time supply chain.
Boeing’s move is not uncommon for a large buyer in a tough economic climate. Moreover, while Reuters reported on the increase to 120 days, publishing a statement where the company confirmed being “in the process of adjusting the payment terms of [its] large suppliers”, aviation publication Leeham News, which first got hold of the information, talks about 90 or 120 days, suggesting payment terms are being negotiated by suppliers.
A Boeing spokesperson explains to GTR that the company is adjusting its payment terms to industry norms, adding that “most aerospace manufacturers pay their suppliers on a net 60, 90 or 120-day basis”. It would not reveal the details of its own payment terms, saying that “specific contract terms are proprietary information”, but adding that “in most, if not all, cases, our new payment terms are in line with our suppliers’ payment schedules to their own (sub-tier) suppliers”.
In any case, this is likely to have an adverse effect of suppliers’ own cashflow, prompting the need for financing solutions such as payables discounting or reverse factoring.
Ad Van der Poel, senior vice-president of financing services at e-invoicing network solution Basware, says: “Boeing’s decision to extend payment terms to 120 days is a typical example of challenging payment practices by an international business. Although this may be triggered by the need of Boeing to manage their working capital, we do need to recognise the impact this type of action has on business development. Many supplying companies will be put at risk by restricted cashflows.
“Every business needs to take responsibility for themselves and their supply chains, which includes reasonable payment terms. As an alternative, Boeing could address its challenge with the help of a third party or by paying its suppliers early and negotiating discounts.”
The decision is part of Boeing’s revamped Partnering for Success (PFS) initiative, which caused controversy upon its launch in early 2014 by asking suppliers to cut costs by 15 to 25% or be put on a “no-fly list”, meaning they would be kicked out of Boeing’s supply chain. The new version of the PFS appears to bring about more flexibility with suppliers.
According to Gary Mendell, president of Meridian Finance Group, the move towards just-in-time supply chains is the more worrying aspect of Boeing’s new strategy. “The more you rely on just-in-time, the less reliable your supply chain becomes, and with such a big, complex supply chain as Boeing, this could result in disruptions,” he tells GTR.
On the topic of just-in-time production, the Boeing spokesperson explains that this has long been a best practice in manufacturing. Asked specifically about the risk of disruption that results from such practice, they replied: “As a longstanding practice, Boeing works closely and continually with suppliers to ensure they can meet our production needs.”
Boeing is under pressure to cut costs in a competitive climate. Last month, the US aviation giant signed a US$25bn deal with Iran Air for the sale of 80 aircraft and leasing of a further 29. This came months after Boeing’s French competitor Airbus closed a deal of similar value for the sale of 118 aircraft to the Iranian airline.
However, Boeing’s transaction is being blocked by the US congress, which recently passed a number of measures making it illegal for US aircraft manufacturers to sell planes to Iran, on the grounds that the country could use the equipment “for military purposes”- though President Barack Obama has warned of his intention to veto the bills.
Boeing has been vocal in its discontent after the legislative move, with commercial jetliner unit CEO Ray Conner quoted by the Seattle Times as saying: “If we’re not allowed to go forward, then sure as heck no other US company should be allowed to go forward either and that would be any US supplier to any other manufacturer.”