It had implemented global best practice of 60-day payment for the largest 20% of its 20,000 suppliers worldwide but it was about 12% in NZ.
Most would continue to be paid 30 days after the end of the month (EOM), mainly those who had less than $100,000 turnover with Fonterra.
Paravicini tried to explain the reasons for and sequence of the change in payment terms in response to the NZ outcry, especially the idea that Fonterra was forcing 90-day payment delays and 10% price cuts on its suppliers.
The 90 day idea was just plain wrong, he said.
Fonterra’s advice to its largest suppliers late last year was a change from 30 days EOM to 60 days EOM.
While it was technically possible someone who invoiced on the first of a month could wait to the end of the third month later to get paid, in practice everyone invoiced near the end of a month, he said.
Therefore the net change was 30 to 40 days, over which time suppliers might need to finance the debt.
Paravicini did not think that was an unreasonable added burden on Fonterra’s largest suppliers in the context of the co-operative’s own “cash conversion cycle”.
It was up to six months after milk was received, processed and shipped that payments were received for dairy commodities sold internationally.
In such tough times for dairy farmers Fonterra had transformed its costs and overheads and made many people redundant.
It had also asked major suppliers to find 10% savings in their own goods and services that they could pass on to Fonterra, he said.
“Fonterra will pay any services and/or products provided on the first day of the month two months following the month of invoice.”
Lukas Paravicini
Fonterra
“We have those sorts of conversations every time a contract is renegotiated and it is very common in the business world,” he said.
However, the wording in the new terms and conditions of supply was still causing confusion and was being taken out of context.
“Fonterra will pay any services and/or products provided on the first day of the month two months following the month of invoice.”
Some suppliers and commentators added one and two months together to get three months or 90 days but the actual change was from 30 days EOM to 60 days.
Paravicini emphasised that Fonterra was following good management practice and would talk constructively to any supplier upset by the new terms.
“Our relationship with the supplier includes know-how, customer service, quality, price and payment terms.”
While not prepared to say in advance of the interim results on March 23 how much the new payment terms had delivered, he said it had contributed to the 50c/kg loan offer to all farmers.
“That was a loan funded by working capital efficiency of which payment terms were part.”
He said the global best practice 60 days payment terms were identified in 2011 and had been implemented in negotiations and contracts worldwide since that time.
But in 2015 Fonterra still had 160 different payment terms, most of them lower than the standard 60 days.
“That was inefficient and needed to improve because in tough times like these every cent counts,” he said.
Letters went out to 1100 of the largest NZ suppliers and the change in terms was subsequently implemented with 1000 of them.
All he would concede was that the pace of implementation since late last year might have caused pain and that Fonterra would work with any supplier thus disadvantaged and which needed more time.
