The Intersection of P2P, Supply Chain Finance and Risk Mitigation (Part 2)

In the first post in this series, Pete Louglin inspired us to dust off our recent research and analysis of using supply chain finance activities to mitigate and manage supply risk. If you got Pete and I together on the same stage to debate the topic -- I'm sure it will happen sooner rather than later -- you'd probably find us nodding our heads in unison more than disagreeing on different strategies. Yet in his recent post on the intersections of P2P, supply chain finance and risk management, I think Pete just begins to scratch the surface of the topic. We've not done much better yet, mind you, but we have gone one step further in suggesting different risk management strategies tied to P2P in our paper: E-Invoicing Comes of Age -- Discovering What's Possible From the Latest Electronic Invoicing/Invoice Automation Capabilities

Until we double-click on the topic again in our next research paper on the topic -- perhaps with Peter, we hope! -- we'll share some of our recent findings and analysis on how to tie the two topics together. As we note in our above-linked Compass paper (registration required -- free to qualified practitioners): "In more advanced cases, finance and treasury are likely to begin to measure the ability of electronic invoicing in reducing uncertain and variability around forecasting near- and mid term cash flow requirements and the ability of programs to enable the active management an evolving working capital strategy and program. Internal audit and risk management programs may also consider metrics pertaining to trending and evolving activity of suppliers around invoice submission/accuracy and behaviors surrounding working capital (e.g., status checks, discount acceptance) queries."

We also suggest that a more advanced step for some companies, which only a small percentage of organizations pursuing a supply chain finance program have achieved to date, is to merge AP with treasury or have it join forces, functionally and reporting-wise, with procurement. In this regard, "From a supply chain finance standpoint, every function that touches suppliers can theoretically benefit (e.g., the early payable of an invoice based upon a reasonable APR can play a material role in reducing business risk and helping an organization to become a customer of choice). Yet for working capital (and potentially even the ability to book the 'savings' from paying earlier as revenue) treasury should take the lead in administering programs alongside or separate from procurement."

This last point is a critical one. In most organizations, we don't think procurement has the clout to drive early payment strategies to reduce supply risk, especially in the area of indirect and services spend. On the direct spend and manufacturing side, we have seen cases where procurement, supply chain and materials management have stepped up to suggest, plan, implement and manage programs that provide early payments to suppliers to fund working capital needs during periods of critical restocking and production when their needs might be the strongest (and where risk is the highest). An example here is at the tail end of a recession, after inventory has been worked through, and demand signals are just starting again.

In the final post in this mini-series considering P2P strategies, supply chain finance and risk management, we'll share what some of the most advanced companies are doing in the area.

In the meantime, 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 the topic and how it fits into a broader P2P context.

- Jason Busch

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