Supporting Micro and Small Business Through Supplier and Customer Relationship Management

Editor’s Note: The SCM thesis Improving Survival of Micro & Small Firms in Latin America During COVID-19 via SRM and CRM Strategies was authored by Rafael Grillo Illipronti and supervised by Dr. Josué Velázquez Martínez ([email protected]) and Dr. Cansu Tayaksi. For more information on the research, please contact the thesis supervisors.

Running out of cash is the main reason why micro and small enterprises (MSEs) face bankruptcy. Limited cash reserves also interfere with the companies’ profitability and growth potential.

These ongoing challenges have been greatly exacerbated by the economic impact of the COVID-19 pandemic. Now it is more urgent than ever to find ways to help small and micro businesses become profitable and stable.

This project explored how strategies associated with the cash conversion cycle and cash management could help.

The time to pay suppliers and collect from customers can be influenced by the type of relationships the company has with its vendors and clients. On the one hand, collaborative relationships can allow for longer timeframes to pay suppliers and collect from customers. On the other hand, adversarial relationships will likely tilt in favor of the strongest link in the supply chain. This is where the concepts of supplier relationship management (SRM) and customer relationship management (CRM) play a key role.

The status quo and the challenge

The data sample collected from 99 companies in Latin America showed that the time to pay suppliers was contributing negatively to the cash availability of micro and small businesses. On average, firms paid their suppliers 1.7 days in advance of delivery. In some cases, payment was required as much as 40 days in advance. These lengthy prepayment terms were alarming and put micro and small businesses at great risk of insolvency.

To overcome this challenge, MSEs must establish collaborative relationships with their suppliers and customers. But how? Suppliers will not simply forgo value for themselves without something in return from micro and small companies. Likewise, customers will not accept payment terms that damage their cash positions. In such a scenario, what is the ideal timeline for firms to pay suppliers and collect from customers so that all companies benefit?

To answer, we must understand that micro and small businesses often base their purchases from suppliers on their cash availability and not their demand. Therefore, we can hypothesize that a longer payment term will free up cash for MSEs and increase purchases. This will increase profit for the supplier and the MSE alike. In such a scenario, the supplier makes an investment to collect later from the MSE but receives a higher profit in return. This trade-off suggests the existence of a breakeven point.

Finding the balance in the supply chain

We determined the breakeven point in an MSE’s increased sales such that the supplier also benefits. This increase only depends on the supplier’s margin, cost of capital, and desired time to collect from the MSE. For a range of different margins and costs of capital, we determined that to collect cash from MSEs upon delivery, sales would only have to increase by 1.5%.
The potential value increase for the supplier is significant if sales increase even further beyond the breakeven point. The value generation for the micro and small firms is also substantial: It can be as high as 17%. This strategy has the potential to allow micro and small business to survive the COVID-19 pandemic. In the future, it can also serve as a sustainable source of growth for MSEs.

Every year, approximately 80 students in the MIT Center for Transportation & Logistics’s (MIT CTL) Master of Supply Chain Management (SCM) program complete approximately 45 one-year research projects.

These students are early-career business professionals from multiple countries, with two to 10 years of experience in the industry. Most of the research projects are chosen, sponsored by, and carried out in collaboration with multinational corporations. Joint teams that include MIT SCM students and MIT CTL faculty work on real-world problems. In this series, they summarize a selection of the latest SCM research.

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