According to the Deloitte 2018 CPO Survey, overall supply chain transparency is poor, with 65 percent of procurement leaders having limited or no visibility beyond their tier 1 suppliers.
If you’ve seen the hit medical TV show House, you know that each episode centers on a team of doctors that work with hard-to-diagnose cases and the sometimes complex treatments they use in order to save their patient. They analyze the symptoms and try to determine the cause of the illness. Some are easy fixes once a diagnosis is made – others take the use of the latest medical technology to make the save. In the end, it all boils down to taking care of the patient, using the most efficient means to do so.
It’s the same with supplier friction – a slowing down or delay in process that results in strained supplier relationships and supply chain risk. Supplier friction is an illness in manual procurement and accounts payable environments; the daily business challenges are the symptoms that indicate you have a problem. Friction costs the purchase-to-pay industry millions of dollars a year. So, how do you know if you’re suffering from this ailment?
Diagnosing Supplier Friction
Recognizing the symptoms of friction is the first step in being able to diagnose the causes. Some may be easy to fix by automating and streamlining processes – while others are more complex, stemming from communication breakdowns or issues in change management. Either way, if these symptoms are left untreated, the results will be diminished performance, subpar work, delays, and lost money.
Just like you can use friction to cause a fire, supplier friction can cause disruptive ‘fires’ in your supply chain and business model.
Know the Symptoms of Supplier Friction
If you are experiencing the following ‘symptoms,’ they will most likely result in supplier friction. We’ll identify the causes/diagnosis of the friction, the prognosis if left untreated, and the prescription to fix it so you can achieve a more balanced relationship with your suppliers.
Symptom 1: Difficult Price Negotiations
Cause of Friction: Misuse of leverage
Prognosis: Distrust, resentment
Prescription: Forge strategic partnerships with suppliers
"When one side benefits more than the other, that's a win-lose situation. To the winner it might look like success for a while, but in the long run, it breeds resentment and distrust." - Dr. Stephen Covey
If the supplier-customer relationship isn’t a win for both parties – they both lose. People who lose in one negotiation often do their best to turn the tables the next time so that they win—and you lose.
Demanding low prices and trying to squeeze your suppliers for savings may work in the short term, but ultimately damages the relationship and hinders the supplier’s ability to stay financially viable. Why not build long term loyalty with your suppliers by seeking win-win negotiations? Forge partnerships with suppliers, especially the strategic ones, and you’ll reap the benefits like stellar service and exclusive access to innovation. A slight compromise on price can mean the difference between short term cost savings and long term value.
Symptom 2: Delayed Payments
Cause of Friction: Slow exception handling
Prognosis: Supplier turnover, process bottlenecks, strained relationships
Prescription: AP Automation
It happens. Sometimes invoices are delayed, they go unpaid because of administrative mistakes, missing approvals, or questions that hold up invoice processing. In many cases, it causes invoices to get held up in exception handling processes, especially in paper-based, manual environments. While the AP clerk tries to track down the necessary information to resolve the exception, the clock ticks on and payment gets delayed. This friction leads to inefficiency, process bottlenecks, and slow payments which strain supplier relationships and add costs that cut into profit margins.
The issue is a result of organizational and process inefficiencies, and the supplier is never made aware of the problem. This lack of communication and transparency regarding the delayed invoice makes the invoice “invisible” and the delays can continue and cause additional problems down the supply chain. Not only are there delays, the supplier has no idea what’s happening, which can breed frustration and mistrust.
AP automation drastically reduces and can altogether eliminate these delays by automating, streamlining, and expediting the entire invoice handling process – even for exception handling. Suppliers have visibility into the process the whole time. So, if an invoice is stuck, they can provide additional information and get the operation moving again.
Symptom 3: Mail Room Overload
Cause of Friction: Receiving high volumes of paper invoices
Prognosis: Slow processing and lost invoices
Prescription: e-Invoice receiving
The average business receives nearly two-thirds of its invoices as paper, according to the 2015 Accounts Payable Automation Study by the Institute of Finance and Management. The rest of the invoices arrive through a number of other invoice delivery channels, including e-mail, supplier portal, e-invoicing network, electronic data interchange, Extensible Markup Language (XML), spreadsheet, web form via a supplier portal, and fax. Yes; fax.
If there isn’t an easy way for a supplier to invoice you through an automated cloud platform and if you don’t provide a simple onboarding process that makes it easy for them to do so, they have no choice but to send invoices via snail mail. Waiting on the Pony Express will result in a complete slowdown of the invoice process – not to mention adding billing costs to your suppliers in the form of postal charges and the man hours used to send paper invoices.
And if your suppliers charge a late fee then you are throwing money away – not only are you creating extra hours of work which is an inefficient use of employee time – you are wasting resources.
Instead, go electronic with a solution provider that can receive all your invoices and turn them into true e-invoices without making suppliers change how they operate today. They should only have to change the “send to” address and the solution takes care of the rest.
Symptom 4: Continuous Inquiries into AP on Payment Status
Cause of Friction: Lack of transparency
Prognosis: Overloaded AP team, frustrated suppliers
Prescription: AP Automation & supplier portal
If your AP team is spending precious time and energy continuously fielding calls from suppliers asking when they can expect payment on their invoices, you have a problem. You need to automate the AP process to speed-up payments and deliver a way to give suppliers the transparency needed to eliminate the constant back and forth.
Automate your AP process and add an e-invoice receiving solution that can facilitate multiple suppliers on a global scale to help streamline invoice receiving and make it easier to deal with other aspects like currency exchange rates, international tax laws, and compliance to regulations. And, give your suppliers access to a supplier portal so they can check the status of their invoices and payment dates at any time, without involving your AP staff. This means suppliers always know what’s happening and AP staff get time back in their day to focus on more value-adding tasks.
Symptom 5: Cash Flow Problems for Suppliers
Cause of Friction: Late & inconsistent payment times
Prognosis: supply chain risk, financial unstable suppliers
Prescription: AP Automation & payments automation
Delays in payment create cash flow issues for suppliers. This is the quickest way to create unhappy suppliers and open the door for supply chain risk. When suppliers – especially smaller suppliers – don’t have the cash flow they need, it hinders their ability to focus on innovation, stay financially stable, and meet the demands of their customers.
The importance of prompt payment and meeting payment obligations with suppliers cannot be overstated. “Suppliers rely on timely customer payments to pay staff, manufacture, market, sell and ship goods, and invest in the business. Late payments negatively impact working capital, economic production, and partner relationships,” according to IOFM executive director Brian Cuthbert.
Best-in-class performers (read: those who have invested in automation) will process a single invoice within 3.5 days while the majority of companies will take 12 days to process a single invoice. Our research shows that 84 per cent of companies pay their suppliers late.
Not only can you speed up invoice handling with AP automation as discussed earlier, you can completely automate the process all the way through payments to ensure suppliers are being paid promptly every time and greatly reduce the risk of miss.
Don’t Get Burned by Supplier Friction
Symptoms of supplier friction give you warning to potential larger problems. The sooner you recognize these symptoms, the faster you can treat the causes and form healthy relationships with your suppliers. The future of business is based on strategic relationships across the supply chain and keeping those relationships strong is crucial to success.
To learn more, read our blog 3 Ways e-Invoicing Improves Supplier Relationships and download our ebook Smarter Exception Handling in the Digital Age. And as always, reach out – we’re here to help!
1 Deloitte 2018 CPO Survey