Friday Rant: A Five-Step Plan to Turning Accounts Payable Into Supply Chain Finance

Even though most companies would likely be better off blowing up their AP function, not paying vendors for 30 days while they slam in a partial hosted automation solution and then started anew (even requiring new vendor registration for existing suppliers) such a drastic step could likely lead to the corporate version of a cold turkey withdrawal from dangerous substances. Bottom line: probably not worth going there, as attractive as it might sound, especially for those like me who believe AP is typically such a corporate scourge. So if you have the time to plan and transform AP correctly, why not aspire to something greater and work backwards?

One thing you might aspire to is what I'll call a "supply chain finance function." I firmly believe supply chain finance is an awful term, as few really know what it means. But if we can define supply chain finance as a means of creating new value for both suppliers (in the form of early payments based on a reasonable APR) and buyers (in many potential forms) based on specific financing and payment mechanisms, at least we have some type of common understanding about what it is. Regardless, turning AP into supply chain finance, at least as a core functional area, is not something you'll be able to do overnight. I see such a migration taking the form of five specific steps:

  1. Investing in an electronic invoicing solution that addresses over 90% of your suppliers. I leave it to your organization to debate the merits of how best to avoid duplicate payments, minimize human touch points, etc. Regardless of whether your electronic invoicing program becomes a full-fledged AP automation initiative (or not), it's essential to capture invoices early enough to enable later-stage supply chain finance payment triggers, options and mechanisms.
  2. Reducing AP "clerk-level" staff by 80% or reassign them to other areas (if you can't achieve this after Step 1, above, then get a new electronic invoicing platform or BPO partner). When it comes to supply chain finance, you'll want a hands-off approach that lets suppliers determine their own payment scheme. AP staff getting involved can only muck things up (unless an exception absolutely requires human intervention).
  3. Either merge AP into treasury (from a functional perspective, although reporting can stay separate) or have it join forces, functionally and reporting-wise, with procurement. 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 even book the "savings" from paying earlier as revenue) treasury should take the lead in administering programs alongside or separate from procurement.
  4. Investigate all of the supply chain finance options available. I've been impressed with a wide range of very divergent offerings. From the truly bank-agnostic and ambitious (e.g., Oxygen Finance) to the market-based (e.g., Pollenware) to bank-based programs (e.g., Citi), options abound. Get smart on everything that's available. And make a decision that leaves you in control without forcing your suppliers to cut off their pinky in return for early payment.
  5. Sit back and let suppliers determine their own fate (and start banking the proceeds). Supply chain finance should always be about management by exception. Just like AP used to be. Right.

Regardless of whether or not your organization ends up evaluating whether AP really should continue to consume corporate air or whether it would be better off ten feet under, I would urge you to take the time to evaluate what supply chain finance can mean for your company. Even though the concept can be somewhat nebulous and the phrase reeks of jargon, what successful programs can actually enable suggests that AP can become so much more than what it is today. And in the process, it can give itself an entirely new name -- and charter.

Jason Busch

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