Citing the need to improve working capital, 3M Co. has changed supplier payment terms from 60 to 90 days, according to a form letter sent to some suppliers.
"In an effort to remain competitive with prevailing market trends, we have changed our standard payment terms with our suppliers to Net 90 Days," said the e-mail sent earlier this month by Deb Fronczak, 3M vice president of strategic sourcing and packaging solutions.
Despite the timing, 3M said Thursday that the change was not in response to COVID-19 but part of a larger change that started in 2017 "as part of our continued emphasis on working capital improvement, and to align with prevailing market trends and industry best practices."
The letter said new payment terms will be a condition of "any purchase orders, contract renewals or new contracts, with no offsetting price increases. We appreciate your partnership in making this important change."
A 3M spokesman said many suppliers are already on the new 90-day payment plan, but couldn't say what percentage of suppliers have yet to shift to longer terms.
Economists and supply-chain experts said 3M is part of a larger trend in delaying payments.
The Minnesota Chamber of Commerce said several members recently learned their product invoices won't be paid for yet another month.
Best Buy announced last month that it, too, was changing payment terms for some key suppliers. Honeywell, which has large operations in Minnesota, sent letters last month asking some suppliers for price discounts and an additional 60 days to pay for goods.
"It is definitely happening. In the [chief financial officer] playbook for what to do during a recession, this is the first item on their checklist," said Tom Derry, CEO of the Institute for Supply Management that surveys more than 1,000 manufacturers each month about economic conditions.
"It can be a brutal reality for small suppliers [but with the pandemic], companies big and small are very eager to conserve their cash. And one of the easiest ways to do that is to extend their terms," Derry said. "The buying company will use the leverage it has to obtain the lowest prices and best terms. That is just how it operates, and suppliers understand that. But they may not like it."
As the fallout of COVID-19 turned volatile, 3M officials told analysts last month that it took "aggressive" action. 3M adjusted operations, furloughed some workers and shut targeted product units seeing weak demand. It expects to slash $350 million to $400 million in costs during the second quarter. 3M also improved liquidity by tapping $1.75 billion in debt.
The many steps taken resulted in a "double-digit increase in cash flow" between January and March. It is not clear what role extended payment terms played in the improved cash flow.
However, on Thursday 3M also reported that April sales fell 11% to $2.3 billion, mainly because of COVID-19. CEO Mike Roman said health care sales grew, but its other businesses saw drops in revenue.
"3M has suffered some recent financial setbacks and is attempting to improve their current cash position," said Ernie Goss, director of Creighton University's Economic Forecasting Group. "Investors and lenders are paying close attention to cash positions of borrowers and investment targets. Extending payment terms to 90 days will have temporary and positive impacts."
Several business managers declined to speak publicly about the change in terms with 3M for fear of retribution and loss of future purchase orders.
3M spokesman Sean Lynch said the company wants to work with its vendors and encourages dialogue if a supplier is financially strapped. Under one option, 3M allows suppliers to be paid in 30 days provided they first discount their bills 2%, he said.
Supply-chain experts say extended payment terms have sent some product vendors scurrying to banks to rework loan repayment terms. In other cases, small suppliers rely on credit cards or factoring companies to carry them through until their product invoices get paid. Still, there is a risk.
"When times return to normal, the supplier may look for other customers," Derry said.
A recent survey by the national Precision Metalforming Association found 53% of responding companies had customers requesting longer payment terms.
Kyle Goldschmidt, assistant professor at the University of St. Thomas Department of Operations and Supply Chain Management, said many large businesses started extending invoice terms from 30 to 90 days because of the 2008 recession.
For suppliers, such change in terms often "makes it more difficult to finance their operations, especially for small and medium-size businesses," Goldschmidt said. The longer it takes a customer to pay an invoice, the larger the borrowing costs will be for the supplier. Longer terms often translate into higher bank interest rates and higher insurance costs, he said.
Steve Schabel, chief sales officer at the metal extrusion firm Alexandria Industries, said he's had "customers requesting extended payment terms, ranging from requests to make new, temporary payment arrangements to offers with unreasonable settlement terms."
Schabel said the firm "understands that some are struggling during this uncertain time. We are in the same situation. We are obligated to pay our suppliers as well. Together, we are doing everything possible to make this work for our customers and our business."
Lori Tapani, co-owner of Wyoming Machine in Stacy, said she is closely watching account receivables. Her metal shop has yet to see a customer extend payments. But last month a large international customer refused to receive or pay for $6,000 worth of newly finished components.
The company told Tapani it was refusing payment because of the pandemic, activating the "force majeure" clause in the purchase order as the reason it believed it could legally break its contract.
"It's a wake-up call," Tapani said. "You have to pay attention when you get a purchase order from someone. Who would have ever thought we would have force majeure issues?"