A manufacturer we’ll call “the company: had a simple, reliable setup: a local supplier for its main raw material, decent margins, and predictable cash flow. Then someone in procurement found a Chinese supplier offering the same material at a much lower price. On paper, it was an easy call. In practice, it nearly sank the business.
Here’s what the numbers looked like, indexed against the local supplier as a baseline of 100.
Margin. The Chinese supplier’s lower unit cost pushed the margin index up to 150 — a genuine 50% improvement on paper. This was the number that got the deal approved.
Delivery time. Shipping from China, customs clearance, and longer lead times doubled the delivery index from 100 to 200. Goods that used to arrive in weeks now took twice as long.
Cash position. This is where it fell apart. The local supplier had offered 120 days of credit — plenty of time to receive materials, manufacture, sell the finished goods, and collect payment before the invoice was due. The Chinese supplier, by contrast, wanted payment in 30 days.
Combine those two shifts and the cash conversion cycle breaks. The company was paying for materials four times faster than before, while goods took twice as long to arrive and get turned into sellable product. Cash that used to be free to reinvest was now tied up for far longer, with far less time to generate it. The cash position index swung from 100 to -200 — deeply negative, and well past the minimum cash position of 50 the business needed to keep operating.
Why the margin number was the wrong number to lead with
Margin, delivery time, and payment terms all get evaluated separately in most sourcing decisions, often by different people. Procurement looks at unit cost. Logistics looks at lead time. Finance looks at payment terms — if it’s consulted at all. None of these numbers, on their own, predicts a cash crunch. It’s only when you line them up together that the trap becomes visible: a 50% margin improvement bought with a 30-day credit window and a doubled lead time isn’t a 50% improvement at all. It’s a liquidity problem wearing a discount as a disguise.
The lesson isn’t “avoid overseas suppliers” — plenty of companies switch successfully. It’s that a sourcing decision should never be scored on cost alone. Delivery time and payment terms determine how long cash is tied up before it comes back, and that number can matter more than the discount itself.
A quick gut-check before switching suppliers
Before signing with a cheaper supplier, it’s worth running the numbers on the full cash conversion cycle, not just the invoice price:
- Days of credit offered — how long do you have to pay?
- Delivery and lead time — how long until the goods are usable?
- Time to convert to cash — how long from receiving goods to collecting payment from your own customers?
Add those up and compare the total cash-tied-up period against what you had before. If the new supplier’s credit terms are shorter than your full cash cycle, you’re now financing the gap yourself — and that financing cost, whether it’s a credit line, factoring, or simply running your cash position into the red, has to be weighed against the margin you thought you were gaining.