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When attempting to enforce a Purchase to Pay policy getting suppliers on your side is one of the most effective measure you can take. When suppliers buy into your P2P processes, you’re halfway there. continue reading…
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TweetPurchase to Pay or P2P (Procure to Pay if you prefer) is a misnomer in most organizations. In reality, P2P is owned and managed either in the procurement organization – in which case it should more accurately be called P2 – or it’s owned in the finance organization in which case 2P is a better term. Rarely – very rarely - is P2P implemented fully, all the way across the organization. But without an effective partnership between finance and procurement, P2P doesn’t work. And depending on where the ownership lies there are very different views on what purchase to pay is.
The Finance Centric View
When it’s is owned in finance, P2P is seen as a means of imposing control. The business needs to ensure that proper processes are in place to ensure that P.O.s are properly authorized, that proper segregation of duties are in place, that capex and opex are properly differentiated and, above all, that there are no anomalies that will make the job of accounting difficult.
The Procurement Centric View
The purpose of P2P is the same when it is managed in the procurement organization however the emphasis is different. There is more focus on building and maintaining processes that reduce cost and ensure that the goods and services are delivered to the business accurately and in timely fashion. Accuracy of catalog data and order functionality are higher on the agenda and the importance of prompt payment to maintain good supplier relationships is seen as more important than management of DPO.
Scope and Breadth of Purchase to Pay
For procurement and finance to partner effectively it’s important to understand the extent to which P2P reaches both from a process point of view and an organizational point of view.
There is a distinction between procurement and purchasing. P2P is about effective process, not about sourcing and negotiation but don’t put procurement out of scope. The terms of engagement between the buyer and supplier are a key component of the P2P relationship and critical elements of the contract negotiation, such as payment terms, are certainly within scope.
And what of the organizational boundaries? P2P does not start with purchasing and end in payment. It starts within the supplier and their sales order processes and ends with the month end accounting processes including cash flow management.
(There are those that would argue that the term “Purchase to Pay” should be “Procure to Pay” or vice versa but these terms have become confused with ERP module branding and it is now a matter of pure semantics which expression is used.)
The Challenges
Anyone that says its easy has never done it. Identifying a shared agenda at a high level is straightforward but making it happen is another matter all together.
Take GRNI for example. GRNI (Good Received Not Invoiced) is an important number for finance. When it’s a big number that’s a bad thing and when it’s a small number, it’s a good thing. And keeping it low means having good ordering and receipting processes. Explaining the critical importance of GRNI to a buyer is a major challenge. To be frank, the buyer doesn’t care.
Similarly, getting agreement on prompt payment is difficult because purchasing and finance have opposing interests – happy supplier vs good cash flow.
But these challenges have to be overcome. Buyers don’t need to become accountants and the finance community don’t need to become procurement experts but they do both need to sit on the same side of the wall and develop a shared agenda and respect each other’s expertise.
P2P is about partnership. Partnership between buyers and suppliers for sure but more importantly, an internal partnership between finance and procurement.
TweetA solid purchasing process saves money, reduces risk and creates control. What is there to not like about it? But implementing a purchasing process successfully is no walk in the park. Many organizations have been persisting for years without success so we’ve formulated the “Seven Steps to Success” for implementing a solid purchasing process.
Implementing a Purchasing Process
- Back to Basics – Garbage In, Garbage Out. If your supplier master data and your catalogues are not bang up to date and accurate you’ll never succeed. Don’t even start before you have this nailed.
- Approval Work Flow – Get this right first time, embed it and make sure that updates to your hierarchy filter through to the purchasing system automatically. As soon as requisitions get stuck in the system, users lose faith.
- Leverage the Suppliers’ Technology – Suppliers love it when their customers embrace their technology. Use Punchout and other collaborative tools – where appropriate – but take care. It can sometimes be difficult to untangle yourself from a deeply embedded relationship.
- Don’t overlook receipting. Build the receipting process as a can’t-avoid activity. The end-to-end purchasing process is only as strong as its weakest link
- No PO – No Pay – No Exceptions – Say it like you mean it and mean it like you say. Supplier soon get the message and they help police your maverick users’ behavior
- Exceptions – There are always exceptions and emergencies and you need to respect this. But remember, users will always follow the line of least resistance so make sure that the compliant process is the least painful.
TweetLet’s indulge for a while in a purchasing and finance fantasy where a CFO and a CPO have a constructive conversation about how best to manage working capital. Suppose there’s a supplier – a strategic supplier with whom the company spends a lot of money – and they’re on 30 day terms. (That is, once they’ve invoiced for goods, they get paid thirty days later.) The CFO and the CPO compare ideas on how to make best strategic advantage of the relationship with this supplier.
The CFO view
“Thirty day terms is quite generous. Most of our suppliers are on 45 day terms and we actually pay on average in about 60 days. DPO (day payables outstanding) is a key measure for us and helps us to optimise our working capital. We take great pride in keeping one step ahead on this and we’d recommend that the contract is renegotiated to 45 days at least”
This is a typical CFO view of course. The only lever they have access to as far as suppliers is concerned, is payment terms and the retention of working capital.
The CPO view
“As a strategic supplier, we value the fact that they buy into our strategic commercial objectives and we are keen to nurture this important relationship. While we are always happy to extend payment terms when it is to our commercial advantage, our risk assessment points to a need for caution with some suppliers and we would be keen not to extend payment terms in some cases for fear of imposing undue financial pressure on them which, in turn, could increase risk to our business. The procurement function is as much about reducing supply risk as it is reducing costs.”
A very measured response and again, a typical CPO stance that takes a very different view from the CFO.
But what about this as an alternative view – the CEO
The CEO View
“As CEO – my primary concern is the bottom line. On the one hand, my CFO wants to optimize our working capital and report strong numbers to our shareholders. On the other my CPO want to maintain a stable and secure supply chain by ensuring that critical suppliers are not put under undue financial pressure.
But if our critical suppliers are feeling the pinch that much – wouldn’t we support them more if we paid early? How valuable would that be to them and how much would they pay for early payment?
If a supplier gave us a 2% discount for payment in 10 days instead of 30, what’s the return on capital? Gaining 2% in 20 days, that’s over 30% isn’t it?”
Snap out of it! Back to reality. The fact is, most organizations are so siloed that treasury management and procurement might as well live on separate planets and even if the benefits of dynamic discounting were recognized, most company’s procure to pay processes are barely able to support payment to terms in any case.
The fact is – discounts in return for prompt payment can give a huge return on working capital but until robust purchase to pay processes and systems are in place, they are just a fantasy.
Unless of course your company has robust P2P processes, in which case – what are you waiting for?
TweetPurchase to Pay can sometimes be a hard sell. In a highly siloed organization where purchasing and finance see themselves as different species, getting buy in to an end to end holistic approach to purchasing is virtually impossible. But without the holistic approach some serious stuff goes wrong. Below are to top 5 problems that occur when purchase to pay best practice is ignored. continue reading…
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