The Intersections of Working Capital and Procurement Strategy (Part 2)

In the first post in this series, I leveraged material from Linda Behan of Nuance and Geoff Peters of Archstone Consulting to define the role of working capital in companies and suggest a few emblematic examples of how procurement organizations that get wrapped up in a particular sourcing-driven strategy that may create unit cost savings can actually end up costing their company far more on a total cost basis. Continuing on, let's turn our attention to the areas that procurement should "shine a headlight on" to drive total cost reduction and working capital improvement. These four areas are "payment terms, terms harmonization, the payment clock and the supply chain."

According to Nuance and Archstone (which is part of Hackett, so some of these suggestions are certainly derived from their materials), best practices companies often implement a "one-time terms cleanup initiative" to move payment terms to appropriate levels as a first step in a working capital improvement program. These strategies may entail harmonizing terms for the same supplier as well as optimizing terms for individual market categories, factoring into account that appropriate terms may differ based on category of spend, goods/services/etc. Procurement should also take the lead in working closely with A/P to understand whether they're capable of taking advantage of early payment discounts (Spend Matters research suggests that few companies are fully able to given a lack of automation in the PO/invoicing process today). In addition, procurement should work with finance and seek to extend terms "across the enterprise" and rationalize the "number of terms available for utilization."

Why is a one-time effort so critical initially? Behan and Peters suggest that companies often pay more quickly than they need to because of a lack of access to information. This is because terms are often "inaccurate in the AP master, multiple terms exist in the AP master, exception handling [is poor] and a lack of discipline in AP handling" leads to efforts that come up short. The root causes of these challenges include a "proliferation of terms that can cause confusion across the enterprise" and a lack of term standardization in procurement and contracting activities. Once a one time clean-up has been complete, follow-on activities should include "embedding terms in master agreements, insuring consistent AP handling (including master agreements)" and strong change management focused on "communicating processes and expectations during supplier meetings" and with internal stakeholders as well.

Jason Busch

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