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In the past, procurement placed greater emphasis on the sourcing and purchasing processes - increasing efficiency through initiatives like category management and procurement technology solutions. Beyond negotiating a payment term, payments were often viewed as a cost of doing business.
The more streamlined procurement processes and widely adopted ERP and e-procurement systems now allow organizations to strategically address payments by quickly recognizing untapped value from the back end.
As procurement looks for ways to generate increased savings, suppliers are often the first call they make. Supply chains have paved the way for value chains, and supplier relationships are now being looked at end-to-end and in parallel with a B2B payments strategy to extract full financial value. As this strategy continues to be beneficial, many organizations are readily adopting payment strategies as the next big wave of innovation. And senior leadership’s buy-in plays a critical role in ensuring proper signaling of these new practices both internally, and externally to suppliers.
It's Not Just Ordering Widgets and Squeezing Suppliers on Price
Although procurement's traditional role has historically been to negotiate commercial terms and mitigate risk, at the end of the day they are the guardians of supplier relationships and responsible for total cost of ownership.
If payments are to provide bottom-line savings, procurement is in an ideal position to lead this charge because their role has visibility over much of the payments process and transactional data. Therefore procurement leaders can more easily see the total payments savings opportunity. Procurement is now benchmarking “best-in-class" payment strategies by creating a payments optimization view into the company’s supplier relationships.
While procurement owns the supplier relationship, collaboration across numerous stakeholders is essential to maximizing value from payments. This includes procurement aligning with suppliers but also with accounts payable, finance, treasury and IT. Additionally, senior leadership’s buy-in can effectively mandate new strategies as the preferred method of payment. Leadership’s targets for procurement can signal that the company is serious about ensuring that new contracts will utilize payment methodology or discounts as a major determinant of successful vendor bids.
For instance, if procurement is engaging in a contract negotiation, why not consult with internal business partners from AP to uncover options for accelerated payment? Perhaps the supplier is willing to offer a discount on the invoice. At the very least, improving the supplier days sales outstanding (DSO) could lead to future negotiating leverage via an improved supplier experience.
Payment strategies aren’t limited to negotiations with suppliers. By incorporating payment strategy as part of the sourcing process, organizations are better positioned to maximize cost savings from the onset. And through senior leadership’s commitment to these new strategies and procurement’s dedication to that vision, suppliers can effectively understand that the company is serious about sourcing from vendors who offer shorter payment terms, or favorable payment methods.
Same Strategy, Different Day
The core pillars of a payments strategy haven’t changed much over the last decade, but procurement’s role as an owner certainly has. These pillars include rebates/incentives, process efficiencies, and working capital management.
In addition to negotiated discounts, the primary source for procurement to generate rebates from payments comes from their corporate card provider (T&E, B2B). In most organizations, procurement is the owner of this strategic relationship and is in a position to identify which suppliers should be paid via these products. Purchasing cards have evolved into strategic B2B payments programs and procurement should not only stay abreast of how best-in-class organizations are reaping the rewards, but also why these programs are increasingly more appealing to suppliers.
Process efficiencies can deliver tangible cost savings, for example from improved invoice handling/processing, automated approvals and arguably the most lucrative, payment efficiencies, i.e., moving from checks to electronic methods. While these are often AP-led initiatives, it is imperative that procurement understand the value being delivered and, when applicable, manage the supplier impact.
Historically, liquidity can be generated and working capital freed by procurement negotiating extended payment terms. With the increased adoption of traditional card-based and electronic B2B payment solutions, there are now several strategies procurement can utilize to contribute cash to the balance sheet, i.e., buyer initiated payments, supply chain financing, dynamic discounting and liquidity exchanges, to name a few. These relatively new strategies are important to procurement because maximum value is generated when a mutually beneficial value proposition is reached between the buyer and supplier, as opposed to extended terms, which are essentially a days payable outstanding (DPO) extension at the expense of the supplier.
While many stakeholders are involved, procurement should lead the charge in gathering all the facts associated with implementing a B2B payments strategy.
Five Steps for Procurement to Create a B2B Payments Strategy
1. Create a current state assessment of the organization’s procure to pay function, benchmarking against best-in-class organizations and highlighting opportunities for improvement
2. Perform a comprehensive spend analysis to define the opportunity and segment your company’s suppliers by product/B2B strategy
3. Measure potential savings opportunity from associated rebates, process efficiencies and working capital benefits
4. Secure buy-in from senior leaders and key business stakeholders. Ensure that the importance of new initiatives is widely understood and use leadership mandates to ensure that the importance of preferred payments methods is understood.
5. Define and own the supplier communication strategy, endorsing the B2B payments program as a strategic initiative
Supplier Benefits from Evolving Payment Strategies
A well-designed payment strategy doesn’t just benefit the buyer, it also benefits the supplier. Supplier benefits can range from: cash acceleration, reduced DSO, enhanced visibility and cash forecasting, process efficiencies from automation and in some cases contract extensions by participating in the payment program.
While each procurement organization will ultimately assess individual risk within the buyer/supplier relationship, best-in-class organizations are using contract negotiations and supplier reviews to drive volume towards their B2B payments strategies.
Procurement should focus on the following three key areas to continuously maximize supplier value:
1. Highlight supplier benefits from receiving accelerated payment, process efficiencies and improved visibility, and even leverage this benefit to push vendors for better pricing
2. Petition for better prices in exchange for including vendors who accept B2B payments on their preferred supplier list
3. Offer a commitment for incremental business tied to B2B payment enrollment
Leading organizations consider procurement to be an influential stakeholder for defining and rolling out a best-in-class B2B payments program. As the owner of the supplier relationship, procurement plays a pivotal role in continued collaboration with AP and finance to create a true procure-to-pay function with the ability to deliver maximum value from supplier relationships.
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