Finance and Procurement: Where Do Savings Come From?

See the first installment of this series here.

Many organizations believe that savings originate from a good contract. However, all that results from a good contract is a negotiated rate, not an actual rate. Savings only materialize if the contracted rate is the rate that is actually paid by the organization. The rate needs to be updated in both the supplier billing system and in whatever system the organization uses to track contracted rates, and accounts payable (A/P) has to insure that the rate paid is the correct one.

Savings (or missed savings) in fact comes from three areas:

  • The first source of savings is reduced savings from contract non-compliance, and that is frequently caused by poor procurement systems alignment. If procurement negotiated a 10% discount across the board on office supplies, the company buys 10,000 packs of printer ink cartridges across the organization a year and the old rate for the printer ink cartridges of $100 never gets replaced by the new rate of $90 in either internal or supplier systems, without a three way or n-tier match, that's $100,000 of savings that never materialize on a single purchased item. With procurement systems alignment, rates get updated and confirmed and negotiated savings materialize.
  • The next source of savings is finance efficiency and effectiveness. Not only does manpower cost money, but it costs opportunity if personnel spend too much time on tactical non-value add tasks that can be automated. For example, invoice processing in a large organization takes a large amount of manpower from procurement and A/P for approvals and payments. Yet if more than 80% of invoices end up being error free and can be automatically approved if they correspond to a purchase order or active contract — this illustrative percentage assumes your purchase-to-pay (P2P) and contracting processes are in order — then human capital is wasted on the effort. You could reduce headcount, but the bigger impact is reinvesting to improve effectiveness in the form of cost savings, cost avoidance, improved cash flow and reduced risk. Late payments can lead to penalties. Duplicate payments is an obvious quick-hit payback area. Early payments lead to lost investment opportunities through early payment discounts and/or supply chain financing. Missed payments lead to animosity, and that can prove even more costly down the road if suppliers fail to deliver their best effort for your organization.
  • Third, supplier performance and operations is also a source of savings. If suppliers are consistently late on deliveries, and orders have to be expedited by the buying organization, that's an added cost. Moreover, if suppliers don't meet quality standards, and a larger number of products than expected need to be returned, that's added cost. If a supplier fails to deliver at all, the costs, especially in direct supply chains, can be an order of magnitude higher related to schedule disruption, stock outs and production downtime. Moreover, this is just the tip of the iceberg, which we will discuss in more detail in a subsequent analysis.

Yet the perfect payment — not too early, not too late, with built-in optionality for suppliers and end-to-end visibility for all participants and broader analytics and insight for procurement — can magnify procurement efforts and create layered alignment. Sealed Air, a manufacturer of protective and specialty packaging for food and consumer goods, was able to accelerate 7.9% of invoices offered for early payment (this data courtesy of a Taulia webinar) and achieve 76% supplier enrollment — a number by our estimates over 400% higher than the typical invoices accelerated under a standard P2P or supplier network deployment, inclusive of e-procurement.

So how do you make this happen? Stay tuned as we conclude this first brief in a continuing series on finance and procurement collaboration.

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