In today’s environment, says Achint Mahajan, principal at business analytics and advisory services consultancy PRGX (Europe and Asia-Pacific), it is more important than ever for organisations to explore the sources of leverage inherent in relationships with both customers and suppliers, and an analytical, data-driven approach is paramount in identifying precise opportunities. There is also a growing recognition that payables offer a valuable opportunity, not least because this is an area where a company can often exercise greater control, he says.
According to Mahajan, the extension of days payable outstanding (DPO) is an important lever, and by combining best practice, good company culture and a detailed analysis of the unique requirements of each supplier and purchase category, organisations can reap significant rewards.
Below are some top-tips that Mahajan believes that internal audit can flag up to finance:
1: Decide who takes the lead
Although the finance or accounts payable operations may possess the data, it is the procurement or purchasing team that manages relationships with suppliers. Either can take responsibility but it's vital that one seizes the initiative
2: Secure top-level support
It's not unusual for DPO improvement projects to fall victim to departmental factions or lack of resources. For these reasons, a dedicated project manager – perhaps even the CEO – may need to help co-ordinate the initiative between different functions. Certainly, senior-level participation is highly recommended.
3: Consider the categories before starting
The company's approach to DPO might vary from one category to another, so it's often useful to run a pilot, establishing a subset of suppliers who can calibrate the strategy and build credibility for the programme.
4: Purchasing and finance should become allies
It’s inevitable that some of these changes could provoke a negative response from suppliers. What's important here is consistency, so you may want to create a training programme for all supplier-facing staff and provide them with scripts or FAQ sheets to help them deal with difficult discussions.
5: Use analytics to make your case
Explore many sources of internal and external data – company financial reports (whether public or private), industry opinion and internal payment terms – to find out how your terms for payment days differ from those of competitors, for example.
6: Reward success as you go along
The ongoing co-operation of both procurement and finance is vital, but the functions are unlikely to benefit equally from this work. Creative incentives and rewards can make the objectives of the initiative more tangible to members of the procurement team who are not usually measured on their contribution to working capital.
7: Segment suppliers and tailor "the ask"
Not all suppliers are created equal, so divide them into clusters and use benchmarking to set targets for each that maximise the suppliers’ likelihood of participation – stretching them without alienating them.
8: Keep detailed records and monitor payment terms
Keep detailed records to avoid misunderstandings and guard against the danger of agreed changes with suppliers unravelling. To prevent suppliers reverting to old habits, include terms in annual supplier relationship views, and monitor the supplier’s compliance with a spend analytics tool.