Working capital specialist, Brian Shanahan tells Gerry O'Kane that Tesco's move to improve its own working capital by taking longer to pay its suppliers, is wrong.

Long accused of pushing suppliers into tough deals, Tesco has ratcheted up its squeeze on them as it searches for improved cashflow.

While it may be asset- or cash-rich, so important is improving the vast amounts of working capital Tesco needs for day-to-day business that it is trying to shore up cashflow by extending payment terms to its suppliers.

In other words it is using its purchasing muscle in a shrinking market to demand that companies allow Tesco to hold onto cash longer while cash-strapped suppliers struggle to handle longer debt periods. Drinks suppliers, amongst other firms, have been given 'take it or leave it' ultimatums demanding drops in prices by up to 10%, cough up extra cash for advertising and a moratorium on price increases.

It has also claimed that some of its suppliers have benefited from falling commodity prices so they could afford to pass on improved cashflows. Suppliers deny this.

"The fact that Tesco and others are trying to extend terms to 60 days is no surprise - we already have Argos extending terms to 105 days and other retailers are attempting similar strategies - what is surprising is the speed at which Tesco are trying to implement these measures," observes Brian Shanahan, senior director at REL, a company with over a decade history in surveying British and European working capital practice.

He believes it reflects poor supply chain planning amongst retailers as the speed of these actions indicates that large retailers are desperate to rebalance the working capital strain that will come with large quantities of unsold stock. Tesco, in particular is under increasing pressure from perceived low-cost chains like Lidl and Aldi.

However the way in which companies like Tesco are trying to improve cashflow, by squeezing payment terms in their suppliers, will have a bad effect on the UK economy over the longer period. "It is pretty standard practice for larger companies to strong-arm suppliers, particularly when times are tough. But Tesco's decision is bad business plain and simple. At best, they'll damage their relationship with these smaller suppliers. Some may even walk away from the relationship. At worst, Tesco's actions could even put some of their suppliers out of business," says Shanahan.

He, like others, believes this type of tactic will cause businesses to fold creating short-term supply issues and possibly force up consumer prices at a time when the market place is ultra competitive.

"There's no question that the current economic environment is very challenging. But rather than resort to these types of desperation moves, the most forward-thinking large companies will do almost exactly the opposite of what Tesco and others have done," says Shanahan. "They'll work more closely with their suppliers and collaborate with them, creating a situation where both companies share key data on manufacturing capabilities, inventory and demand forecasts. It is possible to create a win-win situation here, with buyers more easily able to find the products they need, when they need them, at the best possible prices, and suppliers able to count on their best customers and still make a reasonable profit."