What is the Domino Effect?
The domino effect or chain reaction is the cumulative effect produced when one event sets off a chain of similar events. The term is best known as a mechanical effect and is used as an analogy to a falling row of dominoes. It typically refers to a linked sequence of events where the time between successive events is relatively small. It can be used literally (an observed series of actual collisions) or metaphorically (causal linkages within systems such as global finance or politics).
As an ISO/Business Consultant I meet lots of businesses and when discussing supply chains, I hear a similar story being told – Customers not paying on time and, when I say ‘on-time’, I mean within the agreed payment terms. But, are ‘Customers’ aware of the knock-on effect, the above mentioned ‘Domino Effect’ it has on their suppliers? I sometimes wonder.
Let’s look at a common scenario across the Middle East.
Company A is a big developer and has succeeded in attracting enough investors for a big project. Company A doesn’t have a big inventory of machinery or workers and always sub-contracts out. Therefore, Company A puts out a Tender for several areas of the project.
Having gone through the tendering process, Companies B and C are award a contract each. Company B will supply HVAC equipment and fitting-out and, Company C will supply cabling and installation. (Obviously, there are lots more of sub-contractors, but let’s look at these two, the effect could be similar for the others).
The project has been underway for several months, during which Company B have been manufacturing the aluminium trunking, procuring the AC coolers and identified the cabling runs. Company B has already invested a lot of money.
Company C has also been busy, having reviewed the project plans, they have pre-ordered kilometers of cabling, of various capacity, bought kilometers of cable runs and began the review of manpower and looking for additional workers to ensure their part of the project goes to schedule. Company C has also already invested a lot of money.
The main structure of the project is now complete, slightly behind schedule, but within tolerable limits. Company C begin the first of the main cabling runs and submits an invoice, as per the agreed terms and expects to be paid within 30 days of submission.
At the same time, Company B begin installing the pre-fabricated aluminium trunking in accordance with the plans. They also submit an invoice, as per the agreed terms and expect to be paid within 30 days of submission.
However, after 30 days, the aluminium suppliers to Company B are following up on an invoice for the aluminium sheets they had supplied Company B several weeks earlier. Company B are awaiting the payment from Company A, which would pay their suppliers invoice and some of the other overheads of the project. Company B chase the Accounts department of Company A for payment and, in layman’s terms, ‘get the run around’, i.e., it must be authorised by the Project Manager, it’s with the CFO for signing etc, etc.
Company C have paid their suppliers for the first delivery of cabling from their existing funds. They are awaiting payment from Company A to fill that hole and cover other overheads. They to are chasing the Accounts department of Company A and are also getting the run around. Sound familiar?
Now let’s pause and take a step back. We now have 2 layers of suppliers, Companies B and C and, then their suppliers. 4 dominoes.
But we can add extra dominoes, the suppliers’ supplier and their suppliers. Some supply chains are extensive, especially if materials are coming from overseas!
Now imaging the other sub-contractors. There will always be a pecking order. The Developer and, maybe the CFO, will have prioritised who gets paid first. The knock-on effect, the Domino Effect, like ripples on a lake, will and are felt all the way down the supply line and in some cases, can have a catastrophic outcome for smaller suppliers.
So, what can be done about it. Unfortunately, it is common practice in this region to withhold payment for as long as possible. For me, I can’t understand why. During the tendering process, all tenderers, as part of their response, will have provided a pretty comprehensive costings table for their services. The Developer and Finance team should be able to identify the funds from the investors to pay for each over the course of the project. Obviously, delays do happen, but then a contingency fund should have been allocated prior to project commencement. Is that Common Sense, or am I missing something?
The outcome, as I said above, can be catastrophic for some sub-contractors and suppliers. When a contractor or, supplier has to close due to debt, it’s not just a business closing. It’s the livelihood of lots of works and their families stopping. Their community can suffer, which can affect the economy. Which in turn, can affect future investment into new development projects.
The Domino Effect!
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