Most Large Company Spend is not Accelerated Via Early Pay Programs

I recently went out and spoke to 30 Global Procure to Pay executives at companies in both North America and Europe.  The general consensus can best be summed up by one interviewee.  “In regards to early pay, we are still coming up with strategically how to do that.  We have supply chain finance with banks, we have a Taulia portal for dynamic discounting and increasing our discounts through that portal, but there is still lot of spend out there suppliers don’t accelerate.”

In fact, its important to recognize Procurement doesn’t manage all spend – IT Procurement, BPO, Logistics and of course the vast majority of spend at companies that make things – direct expenditures on ingredients, commodities, raw materials, components, etc. may not be managed by Procurement.  At one bank, an insider told me if you added up supply chain finance, dynamic discounting, and Pcards – at most it touched 25% spend

So what do large companies set up?  Typically its a mixture of the following:

  • Large Tier 1 and critical suppliers are offered Approved Trade Payable Finance if the corporate is able to fund a program with their credit. A few companies mentioned moving these programs to smaller spend suppliers, but this was typically in industries like aerospace where small may still be critical.
  • Supplier portals are popular to provide supplier self-help services and dynamic discounting is a feature. Many of the companies offer some solution here, whether built in-house or via a third party vendor, but early pay discounts are not material and tends to focus on small indirect spend.
  • Pcards still predominate for distributed local spending in plastic form. Virtual cards provide a PO-Invoice process but we have yet to cross the chasm into larger invoice spend. E-procurement systems tied to pcard to do settlement is still in its infancy but has the potential to address a larger portion of indirect spend.
  • A small number of large companies have set up early pay auction platforms for their suppliers to bid to be paid early. As opposed to dynamic discounting solutions that are offered by buyers, with auctions, in theory, suppliers initiate a request for finance based on their marginal cost of borrowing versus being charge a rate determined by the buyer.
  • Digital marketplace purchases via online catalogs such as Grainger, Staples, and now Amazon Business are still very early days, but are another source of pcard or line of credit payment. This is for a segment of spend categories (egs. Parts, MRO, etc.) and not total spend.

The figure below gives a graphical depiction of the early payment methods and gaps.

Figure:                 Gaps around Total Spend

early pay1

One special area to mention is the tail spend.  Early pay for tail spend is challenging. Tail spend could better be described as “nuisance spend” or “tactical spend,” and is comprised of many sub-segments, not just one or two including one-time buys (vs. recurring spend). There is really no one “silver bullet” solution here, although companies use various tools (eauctions, catalogs, outsourcing) and early pay techniques (eg. pcards, dynamic discounting) to address.

The challenge mentioned by many large enterprises is the cost to manage tail suppliers (which could number into the tens of thousands at Fortune 1000s).  Companies tend to attack in a number of different ways – sub-tiering suppliers, highlighting categories of spends and using an outsource specialist, catalog purchase and pcards, and other methods.  The issue for these large enterprises is managing these suppliers is more costly than the money they can save by pushing out payment terms. And herein lies the real rub.  It’s just very hard to eliminate the tail.   As it relates to early pay initiatives, this will continue to be the sweet spot for pcards and dynamic discounting.

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