07 Apr 2011 Purchase to pay plumbing – the critical touch points between finance and procurement – part 2
This is the second part of a two piece article on the touch points between purchasing and finance. You can read part 1 here
Purchase to pay plumbing manual – part 2
Knowing your end of the purchase to pay process is all well and good but, if you are at the purchasing end for example, which part of the payment end do you need to be joined up to? Here’s a few more of the purchase to pay touch points that should help get the P2P plumbing in place.
4. e-procurement user management and specialist purchasing processes
e-procurement users are normally managed from the purchase to pay operational or support team. If this team resides within the purchasing organisation, there is a recognition and understand of specialist and complex purchasing processes. It is well understood that some users have more demanding requirements of a purchasing system compared to others. This isn’t always obvious if the e-procurement system is seen as an extension to the finance system and is managed from within finance. In this case, it is not unusual for the e-procurement system to be designed with a one size fits all approach.
Where e-procurement users are managed outside of purchasing, ensure that the complexity and diverse nature of purchasing processes are reflected in the way the sytem is configured and that specialist needs of some buyers are taken into account.
5. Prompt payment terms & DPO
Paying promptly is an important lever in supplier performance management discussions. A contract manager is in a difficult position in a discussion about late deliveries if the supplier has complaints about late payment. And good payment performance can be leveraged directly to get greater discounts and finer pricing. So prompt payment is a good thing – right?
On the other side of the fence, the merits of prompt payment are less easy to see. Discounts are fine but when your performance is measured in terms of cash flow, the later the payment the better.
Reconciling the different views on payments between purchasing and finances is one of our biggest challenges. A 2% discount for 20 days early payment represents a 30% plus return on capital. But 1 day of DPO is worth $3m to a $billion spend a year organisation. The problem is, they are very difficult to compare – the numbers appear in completely different places in the accounts.
There’s no simple answer, but one thing is for sure, an appreciation of the both these issues – discounting, supplier relationship management, supplier performance management as well as cash flow management and DPO – needs to be shared across both purchasing and finance including
6. Supplier relationship management and payables management
Finally, who owns the supplier relation? Purchasing do of course. They negotiate the contract, manage the supplier performance and deal with the day to day interaction. But how much do purchasing know about the other relationship their organisation has with the supplier? The one managed by finance.
The best relationship in the world, built up over time by a talented team of procurement professionals can be destroyed very quickly if invoices don’t get paid on time. It’s vital to join up the multiple relationships into a single relationship – the single view of the supplier. AP need to know the importance of the relationship – purchasing need to know the constraints that AP work under to perform effectively.