The Forum of Private Business (FPB) blew the whistle on a move by the maker of Johnnie Walker and Guinness to introduce what Diageo confirmed today was a new procurement process from February 1 2015.
This ups Diageo's payment terms (despite a lackluster 2014 the multinational still netted earnings of £2.248bn/$3.39bn in the fiscal year to June 30) from 60-90 days for future tenders rather than for existing suppliers and contracts.
The letter sent to suppliers justifying the extension for "future business" notes that Diageo's payment terms in some territories can be anything up to 120 days, a time frame it says other large organizations also adhere too.
Diageo focused on cash flow and costs
"Diageo continually looks for ways to enable us to invest in the growth of our great brands. This activity supports the long-term sustainability of our business and yours," the company writes.
"In addition, we have significant investment projects underway across our operations in Scotland and Ireland and like any business, to support our investments we need to improve our cash flow and drive out costs," it adds.
Phil Orford, CEO of FPB, said: “We are very concerned, but sadly unsurprised, to learn that Diageo is yet again extending its payment terms, a practice that is hugely damaging for small businesses."
A Diageo spokesperson said in a statement sent to BeverageDaily.com that the FTSE 100-listed company valued “open and fair” relationships with suppliers, but confirmed it was introducing the changes.
Diageo insists it will cough up earlier...if you commit to 'supplier financing'
“We have written to all our key manufacturing suppliers to make them aware that from 1 February 2015 we are moving to a different procurement process for future tenders,” the spokesperson said.
“This will allow them to be fully aware of our procurement terms and to allow them to factor that into future tenders. We have not changed the current payment terms with these suppliers,” they added.
“We also offer a supplier financing programme which enables them to benefit from early payment, in advance of normal payment terms giving suppliers’ assistance with their cash flow requirements.”
But the FPB alleges that Diageo is using so-called ‘supply chain finance schemes’ to cover poor payment practise – in this case by extending the payment terms from 60 to 90 days.
The small business lobby group included Diageo in its ‘Hall of Shame’ in 2009 for doubling payment terms from 30 to 60 days, and claims that, with its new move, Diageo may have broken commitments it made as a signatory to the UK’s Prompt Payment Code.
Administered by the Chartered Institute of Credit Management (CICM) on behalf of the UK Department for Business Innovation & Skills (BIS), signatories to this code undertake to (1) Pay suppliers on time (2) Give clear guidance to suppliers on payment procedures (3) Encourage good practice.
Forum of Private Business questions Diageo commitment to Prompt Payment Code
“We are consulting with the Institute of Credit Management and Department of Business Innovation and Skills to challenge Diageo’s status as a signatory to the Prompt Payment Code and will call for their removal,” the FPB’s Orford said.
A FPB spokesman told this website today today that it had questioned Diageo’s actions with Philip King from the CICM over whether it is in the spirit of the Prompt Payment Code; Orford said that big business usage of supply chain finance scheme to extend payment terms and protect cash flow was a "worrying trend that is spreading across sectors and industries".
The FPB said confectionery giant Mars made a similar move to Diageo on payment terms last year. Although the lobby says it supports supply chain finance schemes in the right circumstances, it says it is fundamentally unfair during a time when the economic outlook in the UK is uncertain for small businesses to be used, in Orford's words, "as a line of credit for larger organizations”.
Lobby insists supply chain abuse threatens 'backbone of British economy'
“This is yet another example of the supply chain abuse that threatens to break the backbone of the British economy – small businesses. The need for assertive action from policy makers to fix the broken big business ethics culture in the UK is self-evident," Orford said.
But Diageo insists it is helping SMEs via its supply chain finance (SCF) scheme (it is one of many big companies that in 2012 agreed to provide such an option) established with Santander bank, which it claims enables suppliers to benefit from early payment (minus interest calculated at Libor +1% per annum, if one insists on using the program) in advance of the new, normal 90-day terms to assist the latter with cash flow.
More broadly, Diageo insists it is serious about 'sustainability and responsibility' in business, releasing 20 new targets for 2020 under this head on December 14, including a commitment to ‘Sustainable Supply Chains’, albeit this target looks further upstream to the farm level.
What do you think of Diageo’s move to extend payment terms to new suppliers? Perhaps you are an SME that thinks it is getting a harsh deal from a larger customer? Please email BeverageDaily.com senior editor Ben Bouckley: ben.bouckley@wrbm.com
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