How important is a strategic roll-out of extended supplier payment terms? Many companies have found out the hard way that public backlash and poor program performance can result from not implementing a strategic roll-out of supplier payment terms. This is especially true when it comes to navigating supplier payment term extensions. These conversations require an understanding of finance strategy, skillful messaging and objection handling — responsibilities usually geared more towards a finance or sales representative than a procurement executive. Yet, few procurement teams are given the appropriate support and education required to extend payment terms across a broad group of suppliers. It’s a point lost on many supply-chain finance vendors (including financial institutions) that spend months training procurement teams to use portals and platforms — but little time preparing them to message and sell the actual extension to suppliers.
Five Components of an Effective Supplier Payment Term Extension
1. Analysis: Procurement needs to establish a strategic and conscientious direction for the term extension program. Why does the company need to extend terms? What is the cash flow goal? Which suppliers should be targeted to help achieve this goal? Which should be avoided? By how long should terms be extended in relation to what the market will bear, and how will this increase be justified?
2. Mandate: Supplier payment term extensions are large-scale, strategic initiatives and should be communicated as such. They should be introduced internally from a position of authority and leadership (e.g., CEO, CFO, CPO) and driven by mandate. The mandate should clearly communicate what the organization is trying to accomplish and why.
3. Messaging: How will better cash flow for your organization benefit suppliers? It’s the question that few procurement teams answer carefully. Suppliers instinctually see longer payment terms as a negative. Procurement must help them reframe their thinking and be prepared to handle objections skillfully. More working capital for new production facilities could mean more business opportunity for the supplier.
4. Execution: Don’t attempt to roll out extended payment terms to all suppliers at once. Focus on certain supplier segments (by industry, geography or size, depending on the company’s unique objectives). Establish phases, timelines and metrics to determine who will be targeted when and how success will be measured.
5. Training: This is the step that synthesizes the analysis, incentive, messaging and execution strategy into a playbook for how procurement will get the job done. Training should address several topics, including: cash flow and supply-chain finance fundamentals; messaging and objection handling; preparation; and outreach protocol.
As a McKinsey report says, procurement is rapidly changing. Extension of supplier payment terms requires strong understanding of financial, supplier management and selling. Procurement education/training is critical, requires executive support, and proper messaging to navigate supplier conversations. Access to supplier stakeholders with strong financial understanding of the benefits/value of SCF is critical. While tech-enabled tools facilitate, they represent a small part of necessary education/training for continued success.
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