Exploring How Supplier Segmentation Impacts Payment Terms and The Need for Early Payment

IPO

This post is based on content from the Trade Financing Matters research paper Accelerating Early Payment: Techniques and Approaches for Accelerating Cash in the Supply Chain.

Companies have a range of suppliers, but they typically fall into 3 broad categories:

  • Critical – These include top supply relationships. With these suppliers, companies may share intellectual property, business plans and strategies. Suppliers in this category typically supply direct materials, including ingredients, components and commodities, to factories and contract manufacturers.
  • Core and Important – These suppliers are often important where a corporation is expanding, such as in emerging markets. They may also be important suppliers on a category basis to 
a brand or multiple brands. For example, cocoa may not be an important ingredient to the company, but it may be very important to one of its main brands. These suppliers could also represent key indirect suppliers that provide business process outsourcing (BPO), IT, marketing and other important services.
  • Non-Critical – These are suppliers that fall into the business-as-usual category with low value activities and low dollar spend, which can be served via e-RFP, auctions, marketplaces and more. These suppliers are referred to as small and medium enterprises (SMEs). Much of what is referred to as indirect spend falls here.

While the world is more complex than the above segmentation, a typical Fortune 1000 company
 may have as many as 160,000 suppliers, of which 10,000 are for production and 150,000 are indirect. When considering early pay acceleration opportunities, these organizations need to consider a menu of solutions, including a variety of techniques we explore and further segment in the paper Accelerating Early Payment: Techniques and Approaches for Accelerating Cash in the Supply Chain.

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