27 Aug 2012 Different views of supply chain finance
In a comment on an earlier article about the cost of DPO, Richard Fitzwilliam commented: “DPO is a key indicator of a company’s health and is one of the levers which drives a company’s share price and therefore its valuation. Discounting does reduce DPO and therefore has a negative impact on share price.”
I would not normally respond to a comment if I disagree with it but Richard’s point is an interesting one and it goes to illustrate very well how DPO, discounting and supply chain finance can be seen in entirely different ways depending on the lens you view them through.
If you take DPO optimization as a business premise – a kind of corporate dogma that follows the argument that DPO negatively effects share price and share price is your single most important business driver, then you will always conclude that DPO is untouchable. It must always be a big number – the bigger the better and extending payment terms to supplier will always be a good thing.
This view is too restrictive. Take a look through another wide-angle lens. There are other factors that effect share price. Profit for example or supply chain risk. There are also other business drivers apart from share price like corporate social responsibility and ethics. It not always all about share price.
Every business is different and there is a wide variety of approaches that can be adopted to meet a wide variety of needs. There is no one size fits all way to optimize cash flow and manage working capital but taking a narrow, conventional accounting approach is short sighted and overlooks some the alternative approaches that can be more profitable.
Pete Loughlin can be found on twitter @peteloughlin