At a recent general membership meeting of the Philippine Institute for Supply Management (PISM), I listened to Ariel Faraon, director of procurement services at Go Global Business Services and JG Summit Holdings, discuss what it takes to build an anti-fragile supply chain.
His presentation covered several dimensions of procurement transformation, from supplier relationships and organizational learning to capability development, process improvement, and artificial intelligence. But one part particularly caught my attention.
In discussing supplier experience, Faraon shared that process improvements resulted in 97 percent of supplier payments being made on time. His presentation also showed one-day average goods-receipt turnaround, one-day average issue-decision turnaround, and 99 percent prompt resolution of supplier queries.
Those are impressive operational measures. But what stayed with me was the thinking behind them. Companies routinely assess their suppliers. Are they financially stable? Can they deliver on time? Do they have enough capacity? Can they maintain quality? Can they withstand disruption?
Faraon’s presentation turned the question around. Supplier risk, he pointed out, can also be self-inflicted. Are the buyer’s own processes making its suppliers more stable or less stable?
That question made me revisit an issue I wrote about some time ago: Does the Philippines need a Supplier Fair Dealing Framework?
At the time, I was concerned about the imbalance that can exist when large buyers deal with smaller suppliers. Supplier relationships can involve fees, deductions, lengthy payment arrangements, promotional requirements, administrative costs, and other conditions that may be difficult for smaller businesses to absorb.
Listening to Faraon’s presentation made me consider another dimension. Supplier fair dealing may deserve attention not only as an issue of equitable business relationships. It may also affect supply-chain resilience.
When the buyer creates the risk
Procurement organizations understandably manage supplier risk. But perhaps we should also start examining what I would call buyer-created supplier risk.
A supplier may enter a relationship financially healthy and operationally capable. Over time, however, delayed internal approvals, unpredictable deductions, changing requirements, administrative friction, or significant working-capital demands can place pressure on that supplier.
This does not mean every long payment term is unfair. It does not mean buyers should stop negotiating for better prices. Procurement professionals have a responsibility to obtain value for their organizations, just as suppliers have responsibilities for competitive pricing, quality, delivery, compliance and performance.
The more useful distinction may be between creating efficiency and transferring pressure.
A buyer may reduce costs through better specifications, competitive sourcing, demand consolidation, improved forecasting, process redesign or elimination of waste. Those can create genuine efficiencies for the supply chain.
But if apparent savings come mainly from transferring financing costs, administrative burdens, uncertainty or disproportionate risk to suppliers, the longer-term result may be different.
One line from Faraon’s presentation captured the issue well: “The supplier you squeeze in normal times may not be the supplier who stretches for you in difficult times.”
That is worth thinking about.
A supplier operating on extremely thin margins while financing inventory, labor, and deliveries may have little room to accommodate an urgent order when disruption occurs. A supplier waiting unpredictably for payment may be unable to invest in additional capacity. A smaller supplier absorbing costs created by the buyer’s internal processes may eventually decide that the account is no longer worth serving.
What appears to be a procurement saving today could therefore become a supply-chain vulnerability tomorrow.
Paying on time is only part of the story
The 97 percent on-time payment figure also made me think about how we measure supplier fairness. A company may technically comply with its agreed payment terms and still create considerable friction before an invoice becomes payable.
A supplier delivers. Goods must be received and recorded. Documents must be validated. An invoice must be accepted. Approvals have to move through the organization. Problems may have to be resolved before the payment process formally proceeds.
This suggests a distinction between policy fairness and experienced fairness. The written policy might say that suppliers are paid within an agreed number of days. The supplier’s experience begins much earlier.
That is why Faraon’s discussion of supplier experience was refreshing. Their approach did not appear to stop at asking whether payment eventually occurred. They looked at the journey, identified pain points, redesigned protocols and ownership, and measured turnaround and issue resolution.
There is a broader lesson here. If we eventually develop a Supplier Fair Dealing Framework, we should probably examine the supplier’s experience rather than simply reviewing what corporate policies say should happen.
What does a procurement saving really mean?
There is also a governance question worth considering. Boards and senior management understandably want to know how procurement contributes to profitability. Procurement savings can be an important measure of performance.
But perhaps the number deserves a companion question:
Where did the savings come from?
Savings produced by eliminating waste or improving productivity strengthen the business. Savings produced largely by moving costs or risks somewhere else in the supply chain may need to be examined differently.
This does not make those savings automatically illegitimate. It means the measurement of procurement performance could benefit from considering what happens to the wider supplier ecosystem. The cheapest transaction is not always the strongest supply chain.
The MSME question
This becomes particularly relevant as we encourage more Philippine micro, small and medium enterprises to participate in larger corporate supply chains. Winning a major corporate account can be transformational for an MSME. But growth itself consumes cash.
The supplier may need to purchase more raw materials, increase inventory, hire people, improve packaging, arrange transportation, or expand production before it receives payment from the customer.
A large order can therefore increase sales while simultaneously creating a working-capital problem. This does not mean large companies should subsidize their smaller suppliers. Neither should supplier-development initiatives shield MSMEs from normal competition.
But supplier development should perhaps not end with accreditation and onboarding. If we want more capable MSMEs participating in corporate supply chains, we should also understand whether the commercial and administrative environment allows good suppliers to remain viable as they grow.
Evolving the Supplier Fair Dealing Framework
My thinking about a Supplier Fair Dealing Framework is therefore evolving.
The first layer should still examine the fundamentals: commercial terms, payment practices, deductions, administrative processes, communication, dispute resolution and whether suppliers can raise legitimate concerns without fearing retaliation.
But perhaps there should be a second layer examining outcomes. Are suppliers able to maintain sufficient liquidity? Can capable suppliers continue investing in capacity? Are they able to innovate? Can they respond when demand suddenly changes? Does the relationship encourage continuity and collaboration when disruption occurs?
This raises a research question that I believe deserves examination rather than assumption:
Do organizations with fairer supplier practices develop more resilient supplier relationships?
We would need evidence to answer that. Supplier fairness should not simply be declared by buyers themselves. The experience of suppliers would have to be measured as well.
Faraon’s presentation offered an interesting perspective on why that research could matter. Anti-fragility is ultimately about becoming stronger through stress and learning. One of his other messages was equally memorable: “Standardize what should not vary. Learn from what must.” Perhaps that applies to supplier relationships too.
Companies will continue negotiating. Suppliers will continue competing. Markets will change, disruptions will happen, and both sides will sometimes disappoint each other. Fair dealing does not eliminate those realities. What organizations can improve are the systems surrounding those relationships.
In my earlier write-ups, I asked whether the Philippines needs a Supplier Fair Dealing Framework. I still believe the question deserves serious discussion. After listening to Faraon’s presentation at PISM, however, I would add another reason for asking it.
Companies understandably want to know whether they can depend on their suppliers. Perhaps a resilient supply chain also requires buyers to ask the question in the other direction: Can our suppliers depend on us?
