Show Me The Money!
Back when I was a consultant and trainer we used to talk about a 4 box model called supplier preferencing, (here is a great video from David Atkinson which helps to explain it) which is basically used to try and understand suppliers views of your organisation.
One of the axis used to segment was called "attractiveness of account". This axis postulated that there were things that you could do to change how attractive you were as a customer or potential customer.
One of these was payment on time.
During these training programs and discussions, I then used another management tool called Herzbergs 2 factor theory of motivation. This model has motivators and hygiene factors. Hygiene factors are what needs to be there for a relationship to exist. One of these hygiene factors is money, both having enough of it, and when you expected it.
In other words, It’s not a motivator, its needed for the relationship to exist.
Finally, to make the point again we used to talk about some wonderful research done by Marie Sako about trust, and the different types of trust. Contractual, Competence, Goodwill.
Contractual trust is the base level of trust, it means keeping your promises. Doing what you said you would do. In my work on influence, when I asked a range of people about what makes people influential, they all said, its about keeping promises and doing what you say you are going to do.
A payment term in a contract is a promise. A promise to pay when you said you were going to pay.
When reviewing research reports all of them have a reference back to the need to look at what our relationship is with suppliers and how we can improve those relationships, especially with regard to driving innovation. These same reports also suggest that payment times to suppliers is something that needs to improve
An Asia Pacific wide study indicated that 84% of respondents had late payments and that around 60% of respondents expected it to get worse or remain the same. For suppliers, especially the SME’s within the region, this can have devastating ramifications. SME’s are reliant on cash flow and visibility into when they will get paid, yet currently hold a $2.4 trillion finance gap in Asia alone. When suppliers are not paid on time and cannot access financing, they ultimately cannot pay their suppliers, supply their goods and services on time or can even go out of business.
The recently released State of Flux survey stated that being a customer of choice and a supplier relationship management leader means you are 3 times more likely to receive innovation from your suppliers, the case study from Toyota contained within it is telling " We also make sure that, after deep negotiations, we sustain our word and pay our partners on-time. Late payment is not an option for us."
A procurement leaders report states that extracting innovation from suppliers remains the ultimate challenge but is essential to survival with one respondent suggesting that "all innovation comes from suppliers for their products".
The Deloitte CPO survey says that supplier collaboration is in the top 3 priorities for 2020,
My friends at the Art of Procurement, had a seasonal take;
You may have also noticed, as I have, a swathe of recent articles about this back this up
So what to do?
It's clear that there is a relationship to how your supplier sees you and is invested in your success and how and when you pay, so as part of any SRM program, the need to have payment terms top of mind about when you pay is essential. What is needed then is to understand the "why" of why suppliers aren't paid on time?
When reviewing the Ardent partners state of e-payables report some things jump out.
The top pressures facing AP are the number of exceptions, and that approvals take too long. In other words, it's not a choice to late pay, it's because of the process.
The top causes of invoice exceptions are discrepancies between PO and invoice, supplier errors, and no PO.
So what are some of the solutions?
The report suggests that having smarter systems and collaboration with external stakeholders (suppliers, finance houses) would have a positive impact on the performance.
When looking at your current systems, you can ask yourself questions like;
how often do I pay my suppliers,
are my payment terms the correct payment terms, and
do I have the right payment methods in place.
If looking at new systems, can they provide you value benefits on top of your current system?
process efficiencies on invoice approvals,
a bank that provides supply chain finance or
payment calendars that match my payment runs.
There is a balance to be had between cashflow and payments obviously and the Deloitte CPO report also suggested that cashflow management was somewhat or more of a priority for many CPO's. The Ardent Partners report also suggested that cashflow was important but also the ability dynamically offer early payments in exchange for reduced costs was also on the agenda. So having the ability to join these two would be a way that procurement leaders can help both suppliers and its internal AP colleagues.
There are some great metrics contained in the report which gives us something to measure performance against and targets to reach, but the relationship between procurement, both strategic and operational, supplier relationships and AP for payments is becoming more and more important and is something that procurement leaders need to ensure it focuses on.
In order to be our suppliers "Ambassador of Quan" we in procurement need to work with our AP colleagues, our suppliers and our technology providers to find ways to reduce the discrepancies, clean the data, and allow us to keep our promises. Then perhaps we can access the innovation that our suppliers want to share with us which will help procurement's value proposition to move, toward value creators and accessors of innovation. If not, our suppliers may not be around long enough to provide innovation…