Payment overdue!

I forgot to pay my phone bill. Well, not exactly forgot. I don’t feel like it. I think the money can be put to better use elsewhere. Am I worried? Nah. Why should the guys down at Bell pull the plug on me? They’d be deprived of my future business. I’ll pay up eventually, sure. When I feel like it.

Yeah, right.

Yet, as unreal as the above scenario may seem this is exactly the situation suppliers to the automotive industry face with their customers, many of whom have come to regard the due date on their invoice as little more than a suggestion.

The situation was first brought to my attention by Ed Bernard of Bernard Mould Ltd. while I was attending the Canadian Association of Moldmakers’ Trade Fair last year. With some moldmakers not getting paid for up to a year after shipping molds to their customers, American and Canadian moldmakers, through their respective trade organizations, had begun discussing ways they might mutually cooperate to resolve the problem. This story appeared in the news section of our January issue.

To follow up this story, I recently contacted Ed, who informed me that the efforts of Canadian and American moldmakers to standardize payment terms had fallen apart due to a legal concern that such a course of action, if followed, was collusion and a violation of Canadian competition law (see story, page 9).

Since writing the initial story, I have learned that the problem of late payment is not necessarily limited to moldmakers and their customers, but is more or less an epidemic in the entire automotive supply chain.

The two obvious questions are, what are the causes of the problem, and what can be done? Neither is easy to answer.

Part of problem seems to originate with the bureaucracy of the automotive supply chain itself, and the complex, evolving relationship between the OEMs and suppliers. Another factor is the way in which automotive manufacturing has changed from supplying pieces to supplying systems. Throw in engineering changes, tardy or altered production schedules and the Production Part Approval Process (PPAP), and the entire system for procuring payment can gridlock.

Several people have told me that the increased amount of outsourcing from OEMs to mega-sized Tier Ones is aggravating the problem. As some of these large Tier Ones have grown bigger and assumed more control and power, they have become indifferent about paying their suppliers on time, I’m told. Yet, in defense of the Tier Ones, they too are often waiting for payment. In the way the industry works, when one supplier doesn’t get paid for a project, neither does the supplier beneath them, or the supplier beneath the supplier, and so on.

One way of possibly improving on-time payment among OEMs and suppliers is to make PPAP more flexible. In general, PPAP requires several approved parts or assemblies to be run on production tooling before payment is issued. One glitch, say a paint defect, can put the brakes on payment to moldmakers and other suppliers even though the problem has nothing to do with the mold or the other parts of the assembly. Why not limit withholding payment only to the supplier responsible for the problem?

By failing to effectively address the problem of delayed payment to suppliers, the automotive heavyweights are only hurting themselves and the industry. Moldmakers and smaller suppliers will become less willing to commit capacity to the automotive business when they know a large chunk of their payment will be eaten up by financing their customer.

e-mail: mlegault@corporate.southam.ca