Most companies today drive a fairly uniform payment terms policy in supplier negotiations, attempting to enforce the most beneficial terms possible uniformly across their supply base. Exceptions are generally driven by negotiations rather than an actual strategy. This approach can strain trading partner relationships as terms are driven more by leverage than by needs. It also is likely to increase supply chain risk, as smaller suppliers with least access to credit are usually the ones that are forced to accept least desirable terms, straining their cash positions and leaving them vulnerable to market shocks.
A better strategy is to approach payment term negotiations collaboratively, considering the positions and needs of the buyer and seller, as well as market conditions. This can be taken even further to also include tiers of early payment discounts, providing greater flexibility to the trading partners based on each partners’ needs. Besides alleviating the problems mentioned above, this helps shift the nature of the relationship to more of a partnership before the contract is even signed. It may not be practical or appropriate for every category purchased, but start building and overall strategy (together with Finance, to understand each others’ needs and constraints) and implementing with the most strategic categories.
Technology already exists that can provide visibility into payment terms and track early payment discounts but future innovations should go far beyond in supporting such a strategy. Barbara Whittaker, former executive director, global purchasing with General Motors, believes “there is opportunity for technology to come along that enables us to measure and look at financial supply chains in more discrete ways. We could have multiple action streams based on market conditions, on what is going on with particular suppliers, or on the different kinds of relationships we have with suppliers. I see technology enabling us to say things like, ‘Supplier X will be on a 30-day term because the model, which derives from live intelligence about our cash flow and other current market conditions, says it makes sense to pay them sooner. The model becomes real time and selective, so we can capture the best value — by supplier — leading to greater total value.’”
Trade Financing Strategies
Trade financing, chronically underleveraged in today’s supply chains, presents a tremendous opportunity to help Procurement simultaneously meet cost reduction and cash flow objectives. Two specific aspects should be considered:
Supply Chain Finance (SCF) is particularly applicable for larger buying organizations with excellent credit ratings. An effective strategy would be to offer SCF strategically for key suppliers, helping them get paid faster by selling their receivables to third-party lenders at much-lower rates than traditional sources. This reduces their cost of capital, helping reduce risk, increase your value as a customer and increasing your leverage in price negotiations.
Receivables Financing enables organizations to submit receivables for sale through an online marketplace. Participating capital providers bid on these receivables, providing better returns than similar liquidity options. By collaborating with suppliers over networks that provide Receivables Financing options, you give greater flexibility to your suppliers, helping reduce their costs and risks.
The technology and communities to enable these strategies exist today and further expansion will increase their effectiveness and ease of employing them.
The sample strategies discussed above imply a change in the nature of Buyer-Supplier relationships, another key theme for the future of procurement.
Alex Saric is Director of Marketing for Ariba Inc.’s EMEA Region. Ariba has recently conducted a series of interviews with many of today’s most seasoned and visionary procurement leaders focusing on their predictions for the future of procurement. The study is called Vision 2020 and includes input from Dawn Evans. The study is available for download here.