TweetThis is the 21st Century.

The secure, ubiquitous global network that is the internet is established as an essential business tool that supports mission critical business processes on an industry wide scale. Messages of all kinds are transmitted between organisations: demand planning information, stock availability, real time commodity pricing, purchase orders, request for quotation and  yes – invoices.

Purchase to Pay (P2P) Relies on a Common Understanding of Format for Invoice Processing

It is true that after the initial investment in implementation that eInvoicing gives a supplier a means to reduce the cost of invoice processing by eliminating paper and giving their customers a value add by allowing them to automatically reconcile invoices by offering them in an electronic format. And it’s the format that is key. The “f” word of eBusiness. Which format should the supplier use? CSV; Excel; Word? 97;2007? OB10 or Ariba? All of the above?

I think you’ll find that all of the above is your only option if you’re a supplier that wants to offer electronic invoicing. Which is not good news for you if you are. You see, you can’t dictate the format of your invoices in the eWorld. Your customers dictate it. And so that small implementation cost that was supposed to give you cost reduction on your invoices becomes many implementation costs and quite soon, your business case becomes like dry sand in your hands – unless of course you select an invoice format that is universally accepted.

Purchasing Cards may be a little overpriced – particularly when interest rates are close to zero – but don’t dismiss them. Whether they use the VISA or MasterCard format or the American Express standard, the transaction format is recognized world wide and has been for decades.

Take advantage of new ways of doing things. Embrace change and modernity – but don’t let anyone persuade you that the new wheel is a good idea.

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Here’s an illustrative, real example of a bank that spent in excess of $250 million per annum on contingency labor. With that spending power, they were able to get margins down to levels that the supplier was barely able to operate with. The CPO was a hero of course, delivering massive saving s to the bank. But there were three areas that were neglected. Compliance; Purchase to Pay Processes (P2P) and risk management.

First, the compliance problem. There was $250 million spent on contingency labour and the deal struck with the single preferred supplier worked because of scale. But although the supplier was the only preferred supplier, compliance wasn’t enforced so that nearly half of the spend leaked to other suppliers on bigger margins and for the single preferred supplier, they weren’t even breaking even. No cosy savings delivered and huge risks introduced through non compliance.

Secondly, Purchase to Pay. P2P is all about recognizing that professional purchasing doesn’t stop at the signature on a contract. It’s about making sure that everything is in place to ensure that the commercial befits are actually delivered and that means that the contract runs properly, including that the supplier gets paid. Managing $250 million of invoices is non trivial and when you have a contract that is balanced on a profitability knife edge, there is no room for late payment.

Thirdly, risk management. The supplier was put through the risk management gauntlet, checking profitability and financial strength and reputation but formal risk management was not completed and no contingency or risk management plan was put in place in the event that the supplier went bust.

So what happened, The contract lasted 6 months. The supplier was losing money and could not tolerate the risk of continuing. For the bank, they were faced with the task of switching $250K worth of contingent labor in a timescale of 3 months. Want that job anyone?

The lessons are obvious. Take P2P compliance seriously and recognize vendor risk management as a key spend management tool. Ensure that the correct purchase to pay processes are in place so that contractual commitments can be fulfilled.

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In a world where sophisticated procurement software and supply chain technology has helped industry squeeze almost every drop of inefficiency out of its supply chain operations, where do you look for further savings when the going gets really tough? The Purchase to Pay cycle (P2P) is one of of the operational areas of any organization that can deliver some significant savings and it’s good to see that some of the leading players in this space are proving it with positive financial results even within today’s markets.

Basware, one of the global leaders in purchase-to-pay solutions with more than 1,500 customers and 850,000 users in over 50 countries around the world, has reported a record turnover of 93 million Euros for 2009 and, despite the challenging market situation throughout 2009, full year net sales grew by 7.6 percent.

This bodes well for the solution vendors but even better for organizations that apply it. We think that there will be significant growth in the application of P2P and financial supply chain technology in 2010 as businesses seek to further embed operational efficiency.

mail@purchasinginsight.com

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Purchase to Pay solutions will help drag businesses out of recession

The news that OB10 have reported growth despite the global recession should not come as a surprise.


The economic downturn was a massive blow to many industries – far worse than they’d care to admit in some cases. Projects were cancelled, investments put on hold, contingent staff ditched to minimise the job the permanent job losses that were unavoidable in order to cut cost. But successful business in the 21^stcentury is already running lean, finding further sources of efficiency without contracting your business is becoming harder and harder. Which is why the OB10 and e-invoicing proposition is getting a listening ear in the board room.

Purchase to pay people have been banging on about this for years. Supply Chain Management doesn’t stop at the receipt of goods – there’s payment terms to be managed, invoice disputes to be resolved and payments to be made. The financial supply chain is a key area to derive further efficiencies from any business and the more enlightened early adopters are going to emerge from the recession sooner than the laggards

(See: What is Purchase to Pay?)

TweetTimes are tough. They’re tough for everyone – big business and small enterprise alike. And we all need to recognize that we all have a contribution to make to ensure we all weather the current economic storm with the minimum damage. So when we hear of large retailers seeking to extend payment terms to their smaller suppliers, my concern for the suppliers is tempered with the knowledge that no-one is immune and we should consider carefully how loudly we bleat when, to be frank – shit happens. So it’s not an emotional reaction that leads me to be very concerned on behalf of smaller suppliers when they are asked to wait 65 days for payment.

When interest rates are in the normal range that we’ve been accustomed to over the last few decades, fluctuation between a few percent and a little over 10%, payment terms is an important P2P lever. Paying late can give the buyer a significant cash advantage. Interest earned on cash (or avoided on the overdraft) can be the equivalent to a few percentage points off the price of the goods bought. To the supplier, it’s a double pain. There’s a cost of interest on extra borrowing but there’s also a cash flow impact that effects their ability to pay for raw materials and manage demand effectively. Factoring is an effective tool for the supplier to assist cash flow of course but it comes at a price. So getting payment terms right is as important as getting the price point right.

But the world has changed. Interest rates are practically zero. The cash benefit to a buyer of extending payment terms is negligible. To the buyer, practically zero interest rates yes – but only if the credit is available. For the supplier, credit being unavailable is worse than credit being expensive. For many small suppliers, an extension on payment terms will be nothing less than disaster and it will be counter productive for the buyer with no significant commercial benefit and a potentially disrupted supply chain.

Delaying payment can be a blunt and brutal P2P (Purchase to Pay) weapon at the best of times and there are sound reasons why some organizations refuse to use it preferring a policy of prompt payment always. At best, delayed payment in 2010 is misguided. At worst, it is a cynical approach aimed at forcing price reduction.

TweetIronically purchasing people are like sales people. They think and are motivated in the same way. They both driven by the desire to outwit their adversary; to squeeze a little bit more out of a deal and, most important to make money. Both have a finely honed commercial instinct; they’re terrible at administration and they have a higher opinion of themselves than anyone they know.

So why is it that procurement, unlike sales and marketing, is often found at the least glamorous end of the spectrum of necessary evils? Procurement will never actually be glamorous of course. No TV executive will ever commission “America’s got Supply Chain” even if it is hosted by Simon Cowell. But why is procurement so rarely seen as truly strategic and a critical part of the business? Because it should be.

Time for a reality check. Procurement is a supporting function. It’s not core business. It’s a supporting function but it is as strategically as important as finance or HR and it’s critical that the organization understands this. Would a department ever take it upon itself to run it’s own HR operation because it felt that only they, in that department, could understand their special HR needs? No. Would a department ever take on its own procurement because only they would appreciate their special procurement need? Yes. In most large organizations all the time. It is very, very common.

Internal PR is crucial and procurement professionals need to start to stand a bit taller and communicate a bit more clearly the strategic importance of procurement.

TweetThe regulation of supply chain tactics is long overdue and will, if acted upon early enough, will help to avoid the potential meltdown in the supply chain of consumer goods.

Following a 3 year enquiry by the competition commission, the UK Government is set to take some control of the supply chains of some retailers by appointing an independent arbiter to help settle disputes between super markets and their suppliers.

According to the BBC, measures are proposed to regulate more closely the way supermarkets deal with their suppliers. These measures include:

• A new, stronger code of practice to be set up – detailing how suppliers should be are dealt with – and applying to all major grocery retailers.
• Grocery retailers to be banned from retrospectively changing contracts with suppliers.
• Supermarkets to employ staff whose role will be ensuring that the code is followed.
• An independent ombudsman to be appointed to arbitrate in any disputes between retailers and their food suppliers. They will have the power to award compensation and will uphold the code.

This is long overdue and urgent. It is a shame that governments worldwide didn’t act more proactively in the financial markets before credit markets ground to a halt so disastrously in 2008. Make no mistake, if the purchasing practices of retailers, and FMCG retailers in particular, are not regulated urgently, we will see the same kind of supply chain paralysis happen in the high street as we did in the financial markets.

It has been argued that regulation will be costly and that this will ultimately lead to increased prices for consumers. This is a simplistic argument that belies the fundamental problems. Procurement professionals know full well the tactics that powerful retailers employ to drive down costs. The malpractice reported in the media, retrospective contract amendments, disproportionately shared marketing costs etc. are just the tip of the iceberg. There is a “jam today” mentality amongst super market buyers where short-term savings are rewarded, regardless of the long term consequences to suppliers and supply chains. Sound familiar? It should do.

It should be a source of shame that some of the biggest retailers in the UK refused to agree a voluntary code of practice and a source of embarrassment that the government has been so slow and lily livered in its attempts at regulation. If the lessons of recent months are to be learned, governments globally should take a much more detailed and closer interest in retail supply chains so that consumers, retailers and their suppliers are protected.

When the financial markets collapse, governments can always print money – they can’t print meat!