Focus on strategic supplier management in Shared Services Center to capture working capital gains from key suppliers
Tuesday, 23 Jun 2015
“We now have a uniform purchasing method throughout the Group. The number of suppliers has decreased considerably” - Ismo Karjalainen, Procurement Director at Finavia.
Product Marketing Manager
“We now have a uniform purchasing method throughout the Group. The number of suppliers has decreased considerably”
- Ismo Karjalainen, Procurement Director at Finavia.
Last time, I discussed the importance of focusing on the entire purchase-to-pay process for better analytics and supplier negotiations. Moving Shared Service Centers towards a fully integrated model with Finance, Procurement and suppliers, new insights can be leveraged for working capital gains. As much as this is a functional shift, it also represents a fundamental rethink about how Purchase-to-Pay can play a core, strategic role within the business.
Giving up defensive cash management is key to better supplier relationships
The evolution of the value of Shared Services Center was a hot topic among Shared Services Center leaders attending the Shared Services Forum meeting in Manchester earlier in the spring. Almost everyone agreed on the importance of a balanced payment network. In such a network, both suppliers and buyers can benefit from lower cost of conducting business.
Unfortunately, the lack of a balanced payment network often results in a situation where working capital gains delivered to buyers are detrimental to the supply chain. Often, buyers resort to defensive cash management, while, according to our research conducted together with MasterCard, 82% of businesses would be ready to invest more in their customers if all invoices were paid promptly. As Shared Services Centers rise to a strategic role within the company, they must ensure that the best performing suppliers continue to invest in the company’s growth.
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During the discussions in Manchester, a lot of people agreed that the supplier consolidation and prompt payment is a great way to improve supplier relationship. But, naturally, there’s more to it than just improved relationships: working capital gains that far outweigh efficiency gains.
Strategic supplier management with easy shopping experience consolidates spend and reduces maverick spend
Shared Services Centers have matured to a point where optimized systems and automated processes help manage invoice payment efficiently. SSC can now apply intelligent analytics to their customers’ consolidated real-time spend information. This allows them to identify categories and suppliers to target for consolidation, and to focus more on strategic supplier relations. At this stage, there is enormous potential to improve margins and to reduce maverick spend.
The purchasable items can be made available through supplier-managed digital product catalogs. Users benefit from a comprehensive and easy shopping experience.
With more systematic approach to purchasing in place, it is easier for SSCs to endorse their customers’ "No PO, no Pay" policies. This type of policy both positively motivates suppliers to adhere to the compliance tracking, and also increases automation later in the P2P process.
Basware customer Finavia wanted to ensure that purchasing was on-contract, and to provide transparency and traceability in procurement. They implemented a centralized purchase-to-pay solution. As a result, as much as 80% of spend is now managed with the system, and the number of suppliers has decreased to 40% from that of 5 years earlier.
With kickback and incentive programs agreed with strategic suppliers, buyers are motivated to adhere to prompt payment in exchange for retroactive incentives tied to spend consolidation. At this point, the SSC is also well equipped to offer a travel and expense management, deploying travel and expense planning and reimbursement processes in one user interface for all the users in the customer organizations.
Efficient working capital management in supplier long tail needs automated solutions
Though supplier consolidation is a lucrative opportunity, it is simply not economically feasible to extend it to a long tail of suppliers. As needs specialize and the long tail of suppliers continues to grow, there is a need to extend working capital gains to the rest of the supplier base without frequent target setting and review meetings.
While one-for-all discount program without automatic payment reconciliation might have been an insurmountable objective at the time of paper-based orders and invoices, automated procurement and invoicing makes this a compelling option for Shared Services Centers of any size. I will talk more about this next time.