My colleague and friend across the Atlantic, Pete Louglin, recently chimed in on a topic we've been thinking about for some time: using P2P and supply chain finance tools to both monitor, manage and actively reduce supplier risk. In a recent post on the topic, Pete suggests that we often ignore the broader business issues driving a supplier's decision to accept a discount: "what is not normally considered is arguably the most important factor of all [in offering an early payment discount option and selecting the terms] -- the mitigation of risk."
In the rest of his column, Pete goes on to examine how procurement organizations are increasingly tackling the management of vendor risk by focusing on "financial strength and stability as well as other non-financial factors such as corporate social responsibility, ethics, environmental factors and political risks." And he's right when he notes, "these risks are nearly always managed reactively or retrospectively." We also agree, as Pete suggests, that it's rare that suppliers will "hold their hands up and declare that they have severe cash flow problems. It makes no sense." But Pete does paint an extreme case -- though I'm sure he's seen it -- when discounts are offered and declined, because accepting a discount may be an admission of a broader problem.
But where Pete does not go in his quick analysis -- and where we believe there is a huge opportunity -- is to collectively mine the history of payment information, discount requests/acceptance and the like to better drive proactive supply risk strategies going forward. As Pete opines, "embedding supply chain finance arrangements such as dynamic discounting into a supplier relationships...as an important safety valve for a supplier during turbulent times" is a smart move.
But there's more that can be done, which we'll explore in Part 2 of this post.
Curious about our thoughts on topic in more detail? We encourage you to download: E-Invoicing Comes of Age -- Discovering What's Possible From the Latest Electronic Invoicing/Invoice Automation Capabilities to learn more about how supply chain finance fits into a broader P2P context.