Purchasing Insight

Purchase to Pay, Purchasing & Procurement Process, Electronic Invoicing

Browsing Posts tagged Purchasing Process

The purchasing card is a great business tool. It empowers people to make purchases without the need for a complex and often expensive purchasing process. When a low value item costs less than the cost of the purchasing process itself, it makes sense to cut through the purchase to pay red tape.

But the purchasing card is beginning to show it age.  It hasn’t really kept up with technological change surrounding it. The merchant fees are excessive, in a low interest rate economy the business case makes no sense and as far as reporting goes, purchasing cards have been trumped by electronic invoicing. Is it the end of the road for the purchasing card? continue reading…

A 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

  1. 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.
  2. 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.
  3. 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.
  4. 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
  5. 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
  6. 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.

Purchase to Pay, P2P and Dynamic DiscountingLet’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?

Purchase 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…