Johnson Controls Unilaterally Imposes Net 90 Payment Terms On All Its Suppliers

We just got a letter from Johnson Controls, changing their payment terms to us. They are extracting "Net 90 days" where before they would pay us Net 30 Days.

Johnson Controls revenue last year was $42 Billion (with a "B") and $1.3 Billion in profit. Does this seem totally unreasonable to anyone else? Aside from the fact that I have a contract with them, that I think would need both of us to agree to amend in writing, it is ridiculous that they need me to "finance" them.

They just earned a price increase for whatever they want to buy from us. Does anyone else in the group sell them products or services? What are the payment terms you extend to large customers?

"They just earned a price increase for whatever they want to buy from us."

Seems like the most appropriate response. If you are going to be a bank for them, add a premium for that...

Requiring 90 days is at the far end of common practice.

I have heard that the Big 3 (Ford, GM, and Chrysler) all have a similar, if not longer payout schedules. I don't think it is as much of an issue if you know going into a given project, but to have terms changed mid contract is wrong.

1. Yes, it's unreasonable.

2. It is starting to become more common.

I think short term it will save them a little bit of money until more people start catching on to what is going on. Eventually more service providers like you will start doing what you propose to do, to tack on a certain percentage as bascially a "finance charge".

Luis, are you saying other industry players require this? Seems like a bad sign if so. Not a lot of overall financial benefit for a fair amount of irritation to others.

We have one client who serves the defense industry that does this, another who is a major gas producer we did a couple years ago, and I think another one we were talking to recently I can't remember. It's definitely from the larger companies, I guess the 1 billion and up ones.

I've had the same from a client, though fortunately not that long an extension.

Even worse, they build in a 2% discount if they paid on time (ie 30 days).

I discussed it with my personal contact at the company, who also said to raise prices - as already suggested here.

Still, this is a big cash flow hit, which can be hard.

I am always negotiating terms off the default contracts, even for public companies. (So far, I've been successful at all but one private company, which I walked away from.)

Maybe when you negotiate your next contract, e.g.

*Raise your prices 10%, offer a 5% discount if paid within 30 days.*

This still allows them their default 90 day payment.

You are just giving them a sweetener to pay early (ie on time)

And they get free press out of it, JCI is winning!

Welcome to working for big multinational companies! They have the clout to pull stunts like this, and they know that there is not a big penalty for them, because at the end of the day, future projects will be compatibly bid, and if you want the project, you will do what you have to win the project.

In another lifetime I worked for one of these behemoth companies and I can tell you that we would not tolerate the slow pays by our customers that we were imposing on our vendors.

My advice is: put them on credit hold. If they need your services, they will reach into their stash and find a way to pay you, despite what some company bureaucrat says in a form letter. If they can unilaterally change a written contract, then they leave you with little alternative.

Good luck!

I did some accounting programming* a long time ago for a company I'd rather not name except to say that it was a huge pharma conglomerate whose name rhymed with 'Jerk', as well as being synonymous with it.

I was astounded find that they had set-up their A/R dept to deny the 2% discount by default, even when paid within 10 days, unless someone complained.

But even worse, across the catwalk in A/P, their policy was to ALWAYS take the 2%, no matter when they actually remitted.

*I was young, I needed the money.

that's what they call 'business logic'....

To put it bluntly, it is breach of contract. You can either put them on credit hold or terminate the contract. You have to decide how important their business is to you. We don't know your circumstances. If you allow them to "have" net 90, you won't see the money for at least 90 days, more likely longer than that.

Many years ago, we did regular subcontract work for a large national construction contractor, installing CCTV systems for a major retailer's new builds. At some point, we'd finished a job, and the accountant submitted our invoice; after 60+ days of no payment, our owner contacted them, only to be told they now had a "180 days net" policy.

We'd always had a good relationship with them (this customer really liked us, which is why we got pretty much all their sub jobs) and they'd always paid promptly before, so of course, our owner proceeded to take a strip off whoever he was talking to... and was informed that as a small business, we "didn't understand how these things worked". Of course, as a small business (the owner, his wife, and two techs), such a delay could have been devastating.

I don't know how many more people up the chain got torn new ones, but I know we did very, very few jobs for them after that. Oddly, we still kept doing jobs for the customer, through other large contractors... one wonders if a number of other sub-trades ran into the same problem and simply refused to deal with that GC any more.

"Oddly, we still kept doing jobs for the customer, through other large contractors..."

So that construction contractor ended up paying notably more, after factoring in the extra layer of additional contractors and subs?

No, just means other construction companies got the jobs for the retailer.

Example: General Contractor A gets the bid to build a new retail site; as the preferred/selected CCTV contractor for the customer, GC-A subcontracts us. On another site, GC-B may win the build, but still subs us, per customer spec.

To be clear, there were two or three different GCs on these builds over a period of several years; GC-A wasn't exclusive or anything. Sometimes one would have a better bid, sometimes another would simply not have the resources at the time of the build.

I'm pretty sure our owner had a chat with the retailer's big-wigs about being leery to work with GC-A, and I wouldn't be surprised if other sub-trades did as well... if so, one would think that would hurt GC-A's chances on future bids.

That is interesting karma, as they just unilaterally received an updated price list at 30% higher than every other national/global intergrator. One percentage point for every extra day of their new payment intent. Interesting how that works. Happy to be their bank now!

We have recently decided to no longer do business with the large companies that are stringing us out 90 -180 or more days PLUS retainage that always somehow becomes open ended. The big companies are nothing more than contract vehicles and we're the guys stuck in an abusive relationship. We end up being their bank while assuming all the risk. In our case it's not worth the agravation.

It was shared with me this week that two national companies have just gone through significant reorganizations. Along with reorganizations often come internal discussions around what they could be doing differently. Someone in A/P must have had the idea to slow down payables and bingo you get the letter. I know these guys at JCI purchase a lot of product and are seen as a world glass organization but turning to the Walmart school of business should cause them harm but, it won't. Manufacturers have set aside business principals and replaced them with greed and JCI will most likely get away with this. It's up to the manufactures to take back control of channels.

The Bigger the co. the worst the payment policys, and the more subs in the tree the later the payments.

We have many national accounts which have a you get paid when we get paid policy or when we really need another job completed.

We also have a client related in with JCI which is a billion dollar co. which pays in 45 days no matter what, by the time the company we sub for gets the payments its 90+ days.

They Require a 30% upfront discount to contract with them and usually a 90 to 120 day payment terms. others have said it took 6 months for payments

With a very low overhead it works for us. But what about the large employee overhead companys I can only imagine the financial outlay to take on this work.

We have had payments extend to almost a year for payments .

But the nice thing is we make premium scale in the process.

usually double the industry average. You have to know what your into to play the game.

I have many friends in this industry who went broke after chasing the accountants around with out getting paid any sooner .

Good Contracts

Good Terms

Good knowledge of what to expect in the process

Also WATCH OUT FOR systems integrator companys who want ( non competes) for all companys to give you a few bytes of work , Recently turned down a non compete which would negate our ability to work for a ton of larger major players.

and then not really great pay to complete thier work.

In my country Net90 and Net180 are the common form of payment for retails, banks, goverment, etc... And also you'te lucky if they respect the date...

In my country Net90 and Net180 are the common form of payment for retails, banks, goverment, etc... And also you'te lucky if they respect the date...

Yes, I've heard that said about your country...;)

With interest rates at historic lows, how big of a benefit is this to companies like JCI? Surely, banks will lend them money at very low rates.

Yes, JCI profit margin is quite minimal, but the savings from interest free loans provided by one's suppliers cannot be that large, especially factoring in the negative side effects (like higher pricing and potential delays) that result from this.

As far as Cash Flow impact it's enourmous, in the short term. You don't have to write a trade payables check for 2 months!

How big is that number?

But for the small guy, it's bad. Not only do you have to wait for your money longer, they can use it as leverage down the line.

If I loan you $10,000, I 'own' you, but if I loan you $1,000,000 you 'own' me.

Cash flow only makes a difference if you cannot get cash. Is there any real reason why JCI cannot get short term loans at very low rates?

Cash flow is a concern to smaller businesses as banks typically consider them more credit risks but surely that is not the case for JCI.

Net / net, my position is that JCI, with no real cash flow concerns, creates much larger problems by trying to force smaller businesses, with cash flow concerns, into funding them.

Cash flow only makes a difference if you cannot get cash. Is there any real reason why JCI cannot get short term loans at very low rates?

I'm sure they can get short term loans at low rates. But can they get a 12 billion dollar loan at low rates?

10x their entire profit last year? Over 1% of the total U.S. bills in circulation? Even if they can, the debt service would be enormous.

Net / net, my position is that JCI, with no real cash flow concerns...

It's impossible to judge their cash flow concerns without knowing their plans.

They could be planning major acquisitions with their new 12 Billion war chest. Maybe they are financing the purchase of competitors that will give them near monopolies in certain markets.

Without knowing their plans for the money it is impossible to say whether the Net/Net is good for them.

On the other hand, for the suppliers, it's pretty much bad all the way around...

"But can they get a 12 billion dollar loan at low rates?"

(1) The only part in play here is the incremental, i.e., they did not pay in a day before, so it would be 30 -> 90 or 60 -> 90. They do ~$3.6 billion revenue per month, so if they were previously at net 30, then it would be 2 months or ~$7.2 billion, not 12.

(2) Yes, the rate of a loan is primarily the creditworthiness of the borrower, and simpler / cheaper by the fact that it is large.

If JCI cannot get short term credit for that, it has a massive problem.

If you say $7 billion and 4% interest that is less than $300 million per year. Yes, compared to their profits, that is significant but how much do they stand to lose in higher prices and more operational problems? For example, if the average vendor raises prices just 0.7% they will net lose.

If JCI cannot get short term credit for that, it has a massive problem.

John, I don't think you are understanding the fact that this is not the same as a short term loan.

It would be like a short term loan if they were going to go back to 30 day terms in 6 months.

Assuming that the business does not shrink and does not become insolvent, when exactly do they ever pay back the 12 billion?

Its a one time 12 billion dollar shot in the arm.

It's short term in that what they are funding is short term. It has much lower risk than a construction project or buying out a company, etc.

We don't know what they are funding with the money. Since they are cash-flow positive, the money just piles up in the bank as they extend their suppliers out.

It could fund a construction project or buy out a company, etc. Let's hope that they at least have a good use for the money.

In addition, to the degree that the business grows, they reap that difference as well. If the business shrinks on the other hand, the squeeze could be costly.

It's basically legal stealing. Their is no financing option that can substitute for this except for a 0% loan of infinite duration.

It is only 'legally stealing' if their business partners have no power or countermoves. But they obviously do, from raising prices, to responding less quickly to requests to cutting corners on work for them, etc.

The only real question is whether the small money they make doing this (relative to JCI's massive size), is not more than offset from negative actions from their suppliers.

I got the 12 billion number by doubling their current trade A/P. If you like 7 billion that's ok with me.