The important point that I want to highlight here is that it’s a process that crosses a number of different functions throughout the organisation. Looked at in another way, these functions can be considered as a series of separate fiefdoms within a larger kingdom.
In this three-part blog series, we take a look at the different princes of the supply chain and their fiefdoms: 1) Procurement, 2) Treasury, and 3) Finance and Accounts Payable. We’ll dig deep into what they worry about and how they might take a different approach to build a stronger kingdom.
In part one of this blog series, let’s take a look at the prince of Procurement.
Procurement – it’s a love/hate thing!
As a Procurement professional, your core role is to go out and buy stuff for the company--it sounds glamorous, right? But you only need to stop and think about it for 30 seconds to realise that it’s not nearly as easy, or as sexy, as that.
A life in the fiefdom of Procurement can be like walking along the tightrope. On one hand, you’re measured on getting the best value or cheapest price from your suppliers while on the other hand, you need to develop and maintain a good relationship with those suppliers. This latter point is essential if you want your suppliers not just to deliver the goods to the contracts agreed, but also to be true business partners.
This balance can be, and often is, made worse by the way other parts of your business interact with the suppliers you have worked so hard to source, cultivate and nurture.
A great case in point is when you secure a favorable discount from a key supplier with whom you do regular business. For example, you might have secured a 2% discount if you pay by day 10 on a 30 day invoice (commonly known as 2% 10 net 30). But in order for this to work, finance has to receive the invoice in the right format with the correct information to get it into the ERP, and the business has to approve and authorise payment before day 10 arrives.
With busy schedules, the critical dates are often missed, at which point there are two probable outcomes: 1) You forego the discount or 2) The business still takes the discount, which breaks the agreement and potentially compromises your relationship with your supplier. And looked at objectively, this type of discount arrangement only gives you one discount opportunity.
Surely, today there are options to be much more creative about procurement and supplier discounting programmes. What’s needed is a new look at Procurement.
Top 3 Opportunities in Procurement That Can Add More Value to Your Business and Suppliers
1. Think more strategically about Procurement.
Move from “How can I secure the best deal for my business?” to “How do I add the most value to my business?” These two statements sound very similar but they are fundamentally different.
The former is focused on getting the best prices, while the latter has a broader set of considerations including best price, product quality, supplier health, etc. After all, finding and setting up new suppliers costs a considerable amount of time and effort. Putting them out of business by driving prices down too far is not a good long-term business strategy!
Even further, move from a world of hit-or-miss discount terms into a world where suppliers can opt to get paid any time between when the invoice is approved and the due date, at a varying level of discount depending on an APR set by the buyer and the number of days the supplier chooses to be paid early.
2. Partner with Treasury, Finance and Accounts Payable.
Procurement needs more flexible access to the business’ cash from Treasury to fund supplier discounting programmes. The cash is tightly controlled by Treasury, and the Accounts Payable systems are firmly in the hands of Finance. Procurement needs to step out of their fiefdom and start talking to the cash guardians to show how their kingdom can become a better place if they work together.
Although Procurement aspires to move from a price-based relationship into a value-based relationship, achieving it on their own is impossible.
3. Implement a comprehensive technology solution
It is key that Procurement provides a vendor portal technology system that offers more than PO functionality. These systems provide transparency, and a plethora of self-service tools that make the supplier, and therefore the buying organization more efficient. Plus, without a vendor portal, offering suppliers early payment discounts is nearly impossible to implement and optimize.
Changing from a best price strategy to a best value strategy partly hinges on restructuring the relationship with suppliers where buying organisations and suppliers become much more flexible about payment terms and discounts.
The only way for Procurement to achieve this is to step out of their fiefdom and start talking to the cash guardians and the finance princes to work together to make their kingdom a better place.