Optimising the Procure-to-Pay Cycle
The Procure-to-Pay (P2P) cycle covers all processes from producing the Request For Proposal in procurement through invoice presentment and processing , to invoice discounting, to payment and remittance. The Spend Management Cycle also includes spending policy and strategy, see below. The overall working capital objective in the procure-to-pay cycle is to optimise the balance between maximising Days Payables Outstanding while at the same minimising the processing and other costs.
Procure-To-Pay and Spend Management Cycles
Source: J&W Associates Copyright© 2011
Procure-To-Pay Cycle
Effective management and automation of the procure-to-pay cycle can produce huge strategic cost savings and release large amounts of working capital. There are a wide range of separate services in the procure-to-pay cycle including:
- e-procurement systems and services
- e-invoicing: systems and services to automate paper invoices and cut the buyer costs from around €18 to €7/payment[Source: Billentis Report 2011] and open up opportunities for invoice discounting.
- dynamic discounting of invoices which offers some of the best investment returns available
- payment and remittance services.
There are also a growing number of procure-to-pay platforms providing integrated services covering purchase order presentment, invoice submission and workflow, invoice discounting and payment/remittance.
Optimising the Procure-To-Pay Cycle
Extending DPO is an attractive option for reducing working capital, particularly for large organisations who are more powerful than their suppliers. But extending DPO can spoil relations with suppliers and late payment is being actively discouraged by governments and other authorities. Fortunately there are ways to extend payment terms without hurting suppliers.
Supply Chain Finance(SCF) solutions (also called Reverse Factoring) which use advanced technology platforms to link buyers and their suppliers are now available from banks and other third parties enabling the buyer to extend their payment terms, whilst at the same time provide their suppliers with early payment based on the large vendor's credit rating based rather than the supplier's which is often much lower than the buyer's. A good example of this is how a major European telecommunications company's introduction of a supplier finance programme has enabled them to extend their payment terms significantly and provide their suppliers with a low cost source of credit. SCF schemes only work well when buyers ensure that, when such schemes are used, there are benefits for both parties, screwing your suppliers just because you have the power does not work and ends in tears.
Step by Step Implementation
Optimising the procure-to-pay cycle is a massive task. Companies rarely follow the same development path, but the one common feature of the successful implementations is a step by step approach, such as the company that upgraded their procurement system before installing an e-invoicing system focusing Purchase Order flipping for their large vendors, and are now concentrating on maximising discounts from their suppliers.
Spend Management Cycle
Spend management covers the whole process from developing the overall sourcing policy and strategy for the main goods and services used by the company. It is typically based on full analysis of the company's requirements and supplier previous performance. After this long term supplier programmes with key suppliers can be negotiated.
To ensure that there is significant reduction in the cost of goods, companies need to ensure goods and services are only purchased from approved suppliers where competitive prices have been negotiated. This can only be achieved if e-procurement systems are used which connect companies and their business processes directly with suppliers and manage all interactions between them. This includes management of correspondence, bids, questions and answers, previous pricing, and multiple emails sent to multiple participants. Visa International research shows that leading procure-to-pay companies have 80% of suppliers under contract, 90% of all travel is booked through an in-house web system, 90% of all spend is with preferred vendors and 75% of office suppliers purchased through e-procurement.
Setting up and managing an e-procurement system can be costly and in many cases they are not cost effective for all purchases. For occasional, 'one-off' purchases it is often not cost-effective to set up a supplier on the e-procurement system and other solutions such as payment cards need to be used.
Fully integrated Spend Management programmes that make maximise the use of preferred suppliers combined with the efficiency savings from fully automated procurement, invoicing and electronic payment systems and which fully exploit the opportunities for invoice discounting and supply chain financing cut costs and the working capital required significantly.