3 Ways Ineffective AP Processes are Endangering Your Supply Chain

Raphael Daniaud/Adobe Stock

Procurement organizations tend to focus on the “procure” part of the procure-to-pay (P2P) process, so much so that the second “P” often has to take a back seat. Yet the payments side of P2P offers strategic opportunities that procurement should consider — as well as critical risks that it must take into account.

Accounts payable (AP) processes represent much more to a business than simply receiving and processing invoices. When AP processes are neglected, they can endanger your supply chain, tarnish supplier relationships, and jeopardize supply quality and continuity. Following are three ways those negative impacts can occur, along with recommendations for turning these possible risks into strategic opportunities.

1. Errors and Poor Processes

The ineffective practices that plague procurement teams on the purchasing side plague the AP world as well. Manual, paper-based processes for handling invoices, issuing payments and entering supplier data frequently lead to unnecessary errors and delays, with the worst-performing companies taking five times as long to process invoices at more than 12 times the cost than their best-in-class, automated peers.

Those costs can quickly add up, especially since bad data requires further manual intervention to correct. Labor costs typically consume 62% of total AP costs, according to APQC research, and data errors are the main culprit. What’s more, bad data can, and often does, lead to bad decision-making. When supplier or contract data is incorrectly entered into master data files, AP teams can accidentally issue overpayments, duplicate payments, or even undue payments, unnecessarily straining working capital.

Inaccurate data in your AP system can also negatively impact your organization’s finances by muddying payment requirements. Without easy access to vendor contracts and payment schedules, AP has little recourse to prevent late or missed payments. Even more problematic, “polluted” data can lead to missed opportunities for AP, including failing to maximize savings through volume rebates or early payment incentives.

Data entry is not the only ineffective process to examine for risks. Even data that was once correct can become a liability. In the case of inactive suppliers — those that haven’t effected a payment within 20 months — there is a distinct risk for fraud since payment details such as bank account numbers can be changed without AP’s knowledge. A simple edit to your organization’s vendor master file can lead to money slowly leaking out of the business due to a lack of management around existing AP records.

2. Breaking Your Supply Chain

Beyond over-reliance on manual and paper-based AP processes, procurement teams must also consider the impact of payment terms on supplier relationships.

It’s no secret that large organizations continue to push extended payment terms onto suppliers. Today, top performing businesses (when it comes to working capital) now collect from customers over two weeks faster but pay suppliers nearly three weeks slower, according to research from The Hackett Group. This trend has led some high-profile businesses such as Kellogg and Proctor & Gamble to extend payment terms far beyond the net 30 days they expect of their own customers — in some cases, up to 90 or even 120 days.

While such tactics can deliver short-term improvements to working capital, procurement and AP should consider the total cost and risks associated with such decisions.

Squeezing suppliers on payment terms and due dates can cause them to incur additional financing costs. And these extra costs can stretch your supplier’s balance sheets to a breaking point.

Your organization may see quick working capital benefits, but if onerous payment terms affect your supplier’s operations, you may also start seeing supply chain problems. Unable to pay their own bills, suppliers could start cutting corners on their own components with lower-tier suppliers. And that could lead to a reduction in quality.

The reality is that in the post-recession environment, smaller businesses still struggle with access to capital, and an aggressive AP approach could ultimately endanger the existence of such a supplier. Improved working capital metrics are hardly worthwhile if you risk disrupting your supply chain in the process.

3. Undermining Supplier Relationships

The pain of ineffective strategic AP processes doesn’t just hurt suppliers. In certain cases, overly aggressive tactics can come back to haunt you. When your organization pushes suppliers to accept longer payment terms in order to maximize cash flow, you risk eroding supplier goodwill in the process. Maintaining solid relationships with your suppliers is essential to the success of your business.

Imagine the cost in time and dollars if, due to an erosion in the relationship, a supplier suddenly prioritizes another customer ahead of you when it comes to delivery times. Without careful management of those supplier relationships, disputes may take longer to resolve, and your negotiating power may diminish. Suppliers may also seek to rein in longer payment terms when it comes time to negotiate new contracts, resulting in terms that could lead to higher costs. Buyers may have significant power in a negotiation, but suppliers have their own power that should never be overlooked.

From Ineffective Processes to Strategic Enablement

Clearly, manual, paper-based AP processes contain many potential risks that organizations must consider when scrutinizing their programs. Yet preventing and mitigating risks is just one piece of a broader puzzle.

Ultimately, procurement needs to position accounts payable as a strategic partner in guaranteeing long-term business success. Handling risks that stem from ineffective AP processes is one way of doing this, along with improving supplier management through better data management and building a culture of trust and collaboration with suppliers.

Just how can procurement do that? First and foremost, it requires a change in mindset within procurement and management from seeing AP as a back office function to positioning it as a strategic capability for the business. In day-to-day processes, it also helps to take advantage of AP automation providers who can support such a strategic approach. Stay tuned for Part 2 of this series, in which we explore just how to position AP as a strategic partner and how AP automation can help procurement get there.

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