In Part 1 of this two-part blog, Sophie Pope, Director of Sales, UK and Nordics, Determine a Corcentric company, looked at how organizations can better position to improve business continuity and resilience, starting with the current state of collaboration between procurement and finance. Part 2 digs deeper into the how’s and why’s of collaboration, both internally and with 3rd-parties.
How about Cash Flow?
We know that procurement is often a juggling act! We use decent supplier relationships, purchasing power, and any other tools in our belt to secure best payment terms, highest quality purchases at lowest price, or indeed best value, to ensure vital continuity of supply, against a backdrop of supply chains becoming ever more complex and ever more volatile.
All this balancing can happen while trying to keep an eye on cash flow and keeping our colleagues in finance happy. Finance may not always appreciate the balancing act going on. Where cash flow is their key metric, finance might view early payment discounts negatively in terms of impact to available cash.
How can better collaboration help here?
1. Extend your payment terms. Obviously, if you don’t really know what your payment terms are and whether you’re really working to them, the next steps are not going to be of much use to you.
Extending payment terms frees up valuable cash flow to impact positively on the balance sheet to help fund investments. However, suppliers can’t always accommodate overly long terms and pushing this out can not only damage the relationship, add time to negotiations, but also can ultimately drive up their operating costs — which will in turn get passed on to you.
What can we do to balance cash flow needs of suppliers and buyers?
2. Supply Chain Financing, or using a third-party funder is an excellent win-win result to ensure your suppliers are paid early. And, as a buying organization, you can pay when you prefer on your finance-friendly extended terms. You benefit from holding onto the cash for the full payment term, but importantly the supplier gets paid when they need to. This can speed up pesky negotiations and ensure a satisfied CFO, because cash flow is positive. Not always, but often, the funder will perhaps take a small cut, but that can often be paid for by potentially combining this with early payment discounts.
3. Early payment discounts. Buyers agree to pay suppliers early in exchange for a discount. These can be fixed discounts (e.g., 2 percent discount when paid on or before day 10 of a 30-day payment term) or on a sliding scale (dynamic discount) up to the invoice due date. The discount can add to the bottom line, and a small slice can be used to fund any factoring necessary.
All this requires slick processes for managing your procure-to-pay process. If you don’t have an automated tool for managing this process, it will be very difficult to ensure you are paying on time, let alone have the flexibility to change up the discounting process. Of course, technology will massively help here, to both reduce cycle times, and control and implement dynamic discounting with your suppliers.
A really important area to promote collaboration is that of Risk Management. We can split risk (and associated data collected to support your understanding of it) out into two main buckets: Risk data that can be collected externally, and internal risk data. Either way, a very good place to start is to correlate impact and mitigation at a supplier level.
Once you have individual supplier risk assigned, with the right technology you can then group this risk by any associated data that you have collected against the supplier to see compound effects, or translate it to financial exposure. If you have data recorded for a supplier, then you measure, mitigate or report against the data and start filtering it into meaningful groups in the event of crisis or time needed for risk planning.
External Data might be as simple as automating and scoring the supplier’s financial information using data from Dun & Bradstreet (D&B), or via feed from external risk services like EcoVadis and Resilience 360. You might want to extend this across digital risk, plugging into new technology offerings like Dark Beam — companies designed to test your cyber weaknesses or those of your suppliers. All these are great and powerful tools to help you understand up-to-date changes in risk profile without using administrative time for most of the double checking that is normally done manually.6
Unfortunately, even with technology, 65% of CPOs have limited visibility beyond their tier-1 suppliers2, so more work may need to unearth hidden risk further up the supply chain.
You can count on your own information being critically relevant. When you have a fully-integrated platform (solution) pulling from one master data source, you can start to do some clever things with extracting real data in from your own systems to discover what’s going on in other departments – all without relying on lengthy meetings to keep everyone up to date.
For example, what if a supplier is always late paying – or worse, they’ve gone into insolvency? You want your buying team to know about this as soon as possible to reach out to them and consider their impact on the supply chain, make alternative supply arrangements and stop placing orders.
Flagging the visibility of a dispute for management, or translating it back to a negative score on the supplier’s scorecard is what ultimately brings value. Once an automated way of flagging risks is performed at a supplier level, you may want to improve tracking methods for measuring trends. This task is difficult to manage if you’re relying on manual processes or human judgement!
Ongoing supplier performance should be a careful balance of automatically collected data extracted from both internal and external sources. That doesn’t mean removing the need for human understanding of the data. You just need everything in one place to enable people to make informed decisions, quickly.
What’s in it for you?
It may seem obvious, but collaborative working leads to a host of benefits for the organization! Aside from the fact that we now don’t have a choice but pay attention to how individuals and teams interact with one another, we really can measure the benefits of finance and procurement teams working together.
1. Share Agenda to Influence Wider Company Performance
Finance traditionally has this overarching responsibility to report on, and exert company-wide influence over the numbers, procurement has responsibility for total spend under management, with the ability to shape external spend. A partnership can improve management and control of financial activities, and in turn, positively impact the bottom line.
2. Better Control over Cost and Consumption
Procurement controls cost by selecting the right supplier and negotiating total costs and ensuring best value, while finance can influence overall consumption through careful budget management. Together, these two roles can combine to ensure optimal demand management and support broader economic objectives.
3. Improved Visibility
More disciplined and accurate corporate performance management can be executed with these teams working together. Setting aligned KPIs will mean you can better understand how procurement performance impacts financial results.
4. Increased Efficiency
When procurement and finance work closely and collaboratively a lot of iterative, sequential planning, budgeting and approvals can be avoided. Less time is spent reconciling data and duplication of effort will be reduced.
5. Understanding Price Trends
By involving procurement earlier in the budgeting process, finance gains the ability to factor in price trends.
Summary – What have we learned?
Working from home restricts our ability to continue with the status quo when the status quo is a manual, disjointed process. Perhaps one benefit emerging from the Corona crisis will be to make it a fundamental requirement of our businesses to prioritize automated and collaborative ways of working. One thing for sure: those that have the tools to collaborate easily online certainly recover faster from having to work at home than those without online tools.
If you enjoyed this two-part series and would like to see how source-to-pay and order-to-cash technology can accelerate your alignment and collaboration agenda and working processes, schedule a no-obligation demonstration.
1. Grant Thornton CPO survey 2018
2. Deloitte Global CPO survey 2019
3. Building a Bolder Legacy – the Procurement Mission Is Underway, 2015, A.T. Kearney, Chartered Institute of Procurement & Supply, ISM
4. Source to Pay, by definition, is the entire end-to-end procurement process from spend management, strategic sourcing, supplier management, contract lifecycle, right through to downstream processes that cover purchase requisitions, purchase orders, receiving, and invoicing. This process is ideally covered by a specialist eProcurement software to streamline the process via workflow and automation in one platform, in order to maximize efficiencies, savings and spend compliance.
5. The Hackett Group, 2017, Sourcing Cycle Time and Cost Measurement Study
Dunn & Bradstreet (D&B)
DHL Resilience 360
This blog first appeared on FutureOfSourcing.com