Guest article by Magali Michel, Director at Yooz
Procurement process costs account for an average of 60% of turnover for most companies.
On one hand, it highlights the considerable extent of savings that can be derived by optimising the procurement function.
On the other hand, it underlines the overriding influence of suppliers on business performance, largely setting the conditions for companies’ ability to face exacerbated levels of competition and restrictive standards, while continuing to meet the ever-growing demands of their own clients.
So, can businesses improve their supplier and partner relationships by optimising their accounts payable processes?
Supplier relationship management: a critical issue for companies
Many companies tend to focus on the first point without always measuring the full impact of their financial policy on managing relationships with suppliers. One trend is for companies to extend supplier payment periods to better cover their working capital requirements.
Of course, it is essential to have an appropriate level of cash and, in some respects, it seems logical to favour inflows over disbursements. But when that reflex is generalised and actually becomes a management method, imbalance or even abuse may not be far behind.
In the UK, small and medium sized businesses (SMEs) across the UK are chasing a combined £50bn in late payments. In total, almost 900,000 hours a day are currently being wasted by companies trying to get paid.
While the UK government having tried a number of times to address the issue, late payments have been hindering SMBs from growing for a long time now. The length of time SMBs and the self-employed are wasting in order to try and get paid is unacceptable. Cash flow is crucial for any business, especially for SMBs, and just a few late payments can tip them into a dangerous financial position.
Charter for responsible supplier relations: what are the stakes?
The first risk in poor supplier relations is financial.
Over the past decade, UK businesses have pressured lawmakers to increase mechanisms and encourage companies to respect their commitments in terms of payment periods and deadlines.
In January 2020, Labour peer Lord Mendelsohn introduced a Private Members Bill to aimed at addressing late payments and strengthening the powers of the Small Business Commissioner. The bill aimed to enforce a 30-day limit for all invoice payments and impose large fines on repeat offenders.
Nearly a quarter (23%) of insolvencies in the UK are caused by late payments, and a 2016 FSB report estimated that if all payments were made on time, there would be a £2.5bn boost to the British economy.
An additional risk for bad payers comes is damage to reputation. This risk is far from harmless, particularly in this day and age of social media where information travels far and wide. A brand’s image is an asset that is both precious and fragile.
Another risk related to late payments is quite simply the risk of destabilising suppliers and making relations more complicated. It is important to remember that suppliers are also confronted with their own needs for liquidity. If they have trouble collecting on invoices, they may find themselves in a very difficult situation.
For client companies, paying suppliers poorly is like sawing off the branch they are sitting on. In many cases, the client itself would have much to lose if one or more of its suppliers were to disappear, potentially even putting the client in a position where it must think more about basic survival than properly carrying out its activity.
Supplier relationships: who is responsible?
In order to mitigate these risks, it is critical to set up close collaboration between Procurement and Finance departments.
The procurement function, a cornerstone in supplier relations, is now positioned as a major lever for efficiency and productivity. In its study “Futurebuy: The Future of Procurement – 25 in 25,″ KPMG points out the importance for Procurement departments to develop their financial expertise.
That would help improve relations with the procurement departments alter-ego, the finance department, in matters relating to managing supplier relations.
Indeed, while the procurement department is often seen as the gateway for outside innovation, namely as provided by suppliers, it must also be able to leverage key indicators that will enable it to speed up and simplify the production of analyses and dashboards that help with decision-making.
How to improve supplier relationships
In this context, document digitalisation and automation technologies represent an excellent solution for optimising the supplier relationship and turning it into its own lever for supporting company performance.
Beyond immediate time savings, supplier process automation drastically reduces data entry errors and duplicates, with the goal of reducing costs and ensuring better management and increased value for people reassigned to more strategic tasks.
A digitalised Purchase-to-Pay process, from orders to invoice payment, archive and storage, enables all involved stakeholders – both suppliers and business teams – to increase the visibility, quality, and efficiency of their P2P process, gain strategic vision on business spend and reduce the processing time and costs by up to 80%.
More opportunities than risks
Managing the supplier relationship is an important issue in controlling risks for the company, but it also represents an opportunity.
Smoothing out potential disputes and financial tensions as much as possible by eliminating payment delays is one way for a company to create healthier relations and contracts, while reinforcing and creating new points for collaboration with suppliers.
Building a climate based on trust encourages suppliers’ commitments and enables the company to fully benefit from their expertise and innovation capacity.
This voluntary approach invites companies to recognise that their destiny is now inseparable from that of their suppliers – even if only on the increasing number of topics for which their joint responsibility is engaged.
By optimising management of that relationship beyond a uniquely financial dimension, the supplier ecosystem becomes an essential and undeniable lever that supports the company’s competitiveness.