Why Corporates Need to Rethink How They Relate with SMEs, by CHRIS ODONGO

Why Corporates Need To Rethink How They Relate with SMEs

 

From supply chain management to partnerships that foster loyalty

I have recently been reading and studying trends on financial problems experienced by SMEs and there is an alarming trend. More and more SMEs are getting into financial straits due to an ever increasing problem around cash-flow. Indeed many of our clients are reporting poor cash flows and are decrying an unfriendly environment.

The burgeoning cash flow problem is caused by many factors such as poor capitalization, over trading, funding mismatch and many other SME related buzz words. One giant culprit that causes many an SME owner migraines is the 'accounts receivables'. It is not that these SMEs are not selling and it is not that they don't have good customers, the major problem is that a majority of their customers are not just paying for goods and services consumed. 

"One giant culprit that causes many an SME owner migraines is the 'accounts receivables'. It is not that these SMEs are not selling and it is not that they don't have good customers, the major problem is that a majority of their customers are not just paying for goods and services consumed."

It is a widely accepted practice among corporations that one of the easier ways to finance working capital requirements is to pay suppliers late. In fact some corporates, especially in the retail sector, have so perfected the model of paying suppliers late that they can boast of financing their expansion using trade credit.

The 'pay suppliers late' problem is so big that the C.S for Finance, Hon. Rotich, recently announced plans by government to wield a big stick at corporates aimed at compelling them to pay on time in order to curb the dreadful vice and hopefully stimulate SME growth. Let's momentarily plead amnesia to the fact that our government is the biggest late payer in our economy.

Very many of our SMEs cheered the announcement and are now waiting with baited breath for the budget to be read and the proposed big stick to be announced as law. I would celebrate with them if I was convinced that a big stick approach alone would solve the problem or if I was convinced that the fundamental problem is one that requires the proverbial big stick.

In my studies, that I referred to earlier, I found some disturbing facts about how the same 'pay suppliers late' problem is being addressed in Europe. In Europe the E.U introduced some legislation much like our C.S has proposed to encourage companies to pay SMEs and their suppliers on time. Incidentally large companies don't suffer the same fate that SMEs suffer at the hands of corporates. It is an accepted notion that SMEs are likely to be paid twice as late as a large corporate who has muscle and meets with the CEO of a fellow large corporate at the club. The large companies in Europe continue to pay late and in fact the issue has become so ugly that some companies are asking suppliers to 'Pay to Stay'. Yes you heard me; if you want to stay on as our supplier you need to pay an annual license fee. The pay to stay fees are in addition to suppliers having to accept incredulous late payment terms and of course suppliers are required to give competitive prices.

I submit to you that the legal route alone is unlikely to yield any results. Don't get me wrong I am not saying no to the law. I am only saying that, the law alone cannot help the SME.

I would like to propose that we consider a new paradigm. A new way of thinking about how corporates relate with SMEs. I have to admit though that the way of thinking I am proposing may not be new to everyone as it is a way that has been practiced by many corporates before and has proven not only to be morally correct but also highly profitable as it has built unrivalled competitive advantage.

My proposal is that corporates consider working with SMEs in their value chain as partners in delivering competitive value to their customers in order to foster loyalty not only from the customer but from the supplier too.

The case for supplier loyalty has been made in Kenya several times with the most notable examples being when a new brewer came into the country for the first time and went shopping for suppliers from the only reputable brewer existing in the market and we all know the fall out that resulted from that encounter. Would it have been different if the incumbent had built deep supplier loyalty? Perhaps it would have. Another example is how one local milk processor has been known to foster close ties with farmers in order to win their loyalty and protect their supply chain from a growing aggressive competition. The milk processor has even organised it's own annual dairy show to fete the farmers in it's network.

Further afield there is the example of Toyota and Honda as reported by Jeffery Liker and Thomas Y. Choi in their 2004 article "Building Deep Supplier Relationships". They report that Toyota and Honda were able to outperform their rivals GM, Chrysler and Ford in the American market by building close knit ties with their suppliers where they would even send senior executives to work closely with their suppliers in order to understand deeply how their suppliers worked and thereby find ways of enhancing efficiency, reducing cost and building synergy. Toyota and Honda fostered deep relationships without compromising on supplier competitiveness by engaging up to three suppliers for each item required. The intimacy achieved saw Toyota and Honda cut costs and launch more innovative products in the market than their rivals.

"My idea is simple. I would like corporates to look at their suppliers as an integral part of delivering value to their customers and seek to foster closer working ties with them."

The kind of deep intimacy witnessed in the case study lends my idea the credibility that it needs. My idea is simple. I would like corporates to look at their suppliers as an integral part of delivering value to their customers and seek to foster closer working ties with them and deepen loyalty. By adopting the supplier loyalty approach it is easy to see corporates being truly interested in their suppliers' well- being which will naturally lead to them paying their suppliers on time and eventually building an ecosystem of SMES that are loyal and willing to go to any lengths to ensure that their corporate customers' businesses succeed.

 

Chris is the director in charge of entrepreneurship development at Wylde International. He can be reached on email at This e-mail address is being protected from spambots. You need JavaScript enabled to view it. . You can also follow him on Twitter at @odongochris