Best Practices in Supply Management Journal

70th Edition, February 2015

Articles In This Issue

Founder Appearances, Articles, and Reader Job Opportunities.

 

Founder Articles, Appearances, and Online Events:

Mark Trowbridge wrote a featured article in the March edition of Supply Chain Management Review Journal titled "Put it in Writing - Sharpening Contracts, Reduce Risk, & Boost Supply Chain Performance" which can be viewed by clicking Article Link

May 5th, Mark Trowbridge will present at the ISM International Conference (100 Year Anniversary in Phoenix Arizona) on the topic of Technology Contracting - Moving Into the Cloud (Session #IG)

May 3rd to 6th, please visit Strategic Procurement Solutions' booth in the Exhibit Hall of the ISM International Conference. We'd love to meet our readers!

May 4th to June 12th, Mark Trowbridge will teach and moderate a six-week long online training forum on the topic of Expert Strategic Sourcing - Driving Quality, Lowering Costs. Weekly web videos and online class discussions & assignments will be part of this forum.  Click here for registration information  eLearning Program 1
 
June 1st to July 10th, Mark Trowbridge will teach and moderate a six-week long online training forum on the topic of Practical Procurement Management - Process, Tools, Techniques. Weekly web videos and online class discussions & assignments will be part of this forum.  Click here for registration information eLearning Program 2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This electronic journal is distributed bi-monthly to 
nearly 14,000 Supply Management Professionals around the globe. Note that our educational articles are 'in depth', unlike most online publications.  We hope you enjoy this edition. Feel free to forward to your SCM colleagues!  And keep SPS in mind when your organization needs top quality Supply Management Consulting, Employee Skills Testing & Training, P2P Efficiency Reviews, Cost Reduction Support or SCM Staff Augmentation/ Recruiting Services.

 

 

"Supplier Payment Timing - A Misunderstood Investment" - by Mark Trowbridge, Principal, CPSM, C.P.M., MCIPS

Prior to my entering the supply chain consulting sector 16 years ago, I led a portion of the procurement operations of a global financial services company (which today manages more than $1.4 Trillion USD in assets). During my time there, I learned several valuable lessons about the time value of money.  Some of those lessons have subsequently proved helpful to Strategic Procurement Solutions clients, as we help them optimize their Procure-to-Payment (P2P) process.  

At that time, our firm processed 30 Million demand deposit transactions every day.  If those transactions slowed down by an average of five minutes during a month, our firm would lose more than $5 Million in "float".  "Float" is interest revenue lost because a deposit is delayed.  And you can't earn interest if your don't invest the money in a timely manner.

 

In a similar manner, procurement groups can benefit from "float" in managing their payments to suppliers.  This article will discuss four lessons which organizations can learn about optimizing the "time value" of supplier payments:

 

Lesson #1.  Payment Term Discounts are Nearly Always Worth Taking- A client's Controller issued an edict for their procurement and accounts payables groups ONLY to set suppliers up with Net 30 or Net 45 day payment terms, even if their suppliers offered a discount for faster payments (for example, "2% 10 - Net 30).  Their Controller was quoted as saying, "We get a much better annual return on money than a 2% discount - so management is going to invest that money rather than giving it away." 

 

Here's the problem with this Controller's statement.  The 2% isn't an annual figure.  It's based upon moving the payment timing from 30 days to 10 days...just a 20 day acceleration.  When the effect is annualized, a 2% 10 day payment term discount equates to a 22% net difference.

 

So when our consulting team met with the firm's finance group, I asked their Controller "If I could tell you the name of a stock which is guaranteed to increase in value by 2% every 20 days, would you want to buy shares?" They said, "Of course".  So I explained the math, and the Controller changed his company's approach to accepting discounted payment terms...

 

Lesson #2.  Paid Suppliers are Happy Suppliers - If you'll go back in time with me, try to remember your college psychology or organizational behavior class, where you were taught about Abraham Maslow's Hierarchy of Needs.  Simply summarized, Maslow theorized that human beings will not become motivated performers if their foundational "Safety" or "Security" needs are unmet. 

 

So guess what is the primary "Security" level of need fulfillment in a buyer/supplier business relationship?  Yes, it's being paid in a timely manner for their provision of products or performing services.  You can't expect superior performance from a supplier whose payments are overdue.

 

On-time payments are a huge factor in today's Business-to-Business (B2B) interactions.  In a controversial manner, some large businesses are pushing payment of their suppliers out even longer than ever before.  The British Telegraph newspaper has recently published articles about three leading global corporations which are extending their standard payment terms from 60 out to 90 days.  The article was so controversial that the British government is now performing a formal study about the effects of unfair corporate payment terms upon the business community. 

 

A Wall Street Journal article (2012) reported that 64% of 850 small businesses surveyed by the National Federation of Independent Business (NFID) had invoices which went unpaid for at least 60 days (beyond terms) and 20% of those businesses said delinquencies were getting worse.  Another study performed by the Kauffman Foundation found that, "Of nearly 5,000 small businesses, 14% cited late payments as their biggest business challenge..."


 

These trends do not necessarily represent all firm's manner of paying their suppliers.  For example, Wal-Mart is considered to be one of the largest non-governmental buying organizations in the world.  The firm is certainly known for being highly-aggressive in negotiation of prices and management of their suppliers.  Yet a quoted study found that, on average, Wal-Mart pays its suppliers in 29.5 days.  Perhaps Wal-Mart's management understands the value of managing "float".

 

So what do these factors mean to us in the procurement profession?  The earlier-mentioned 2012 Wall Street Journal article quotes one business owner, who said, "There are absolute limits to how long companies can push their payables.  At some point, vendors push back through open negotiation or higher prices."  Those are words to which every procurement professional should take note! 


 

Lesson #3. Salespeople Don't Make Payment Term Decisions- It is usually a supplier company's finance organization which makes decisions about whether to offer its customers discounted payment terms. Those decisions are often based upon the company's liquidity as well as up front expenses incurred in their business model. 

 

Certain industries are more likely to offer/accept payment term discounts.  For example, payment discounts are often accepted by professional services firms because they incur labor and travel expenses up front.  Small manufacturing firms with a high raw materials cost will often respond well to requests for discounted payment terms (for example, printing firms have to buy paper up front that can represent 60% of their total product price). 

 

In fact, many sales organizations which are commission-based actually pay the salespeople percentage commissions based on the full billing amount (payment discounts are not deducted from the employee's compensation formula). 

 

Despite the foregoing, a relatively low portion of supplier organizations will pro-actively offer discounted payment terms.   But when asked, around 11% of typical supplier companies will agree to discounts in exchange for faster customer payments.  If an organization has 1,000 suppliers, that's around 110 companies which may accept discounted terms!

 

The trick is to getting discounted payment terms is to ask.  There's an old expression which my colleagues and I apply when teaching negotiation workshops... "If you don't ask you don't get".  The long range strategy is to ask suppliers about payment term discounts in each RFx package you send out.  But it takes a long time to wait for every contract to expire if that is your only way of asking.  Strategic Procurement Solutions has a proprietary way of asking every one of an organization's suppliers which can identify savings that are just sitting there right now.   As hockey star Wayne Gretzky once said, "You miss 100% of every shot you never take."

 

Lesson 4.  To Get Benefits from Discounted Payment Terms You Must First Take ThemFinally, having discounted payment terms in a contract or purchase order doesn't do any good unless Accounts Payable (AP) captures the discount.  So AP staff has to be instructed to take term discounts and pay on time.  And even if AP is instructed to take payment discounts, they can't do that if their internal customers haven't entered receiving entries or approved invoices for payment in a timely manner.  So if we want payment term discounts to be taken, procurement professionals must pro-actively work with both AP and internal operations to make sure they are processing discounted invoices quickly.

  

Like payment terms, Strategic Procurement Solutions quickly helps our clients find many other ways to save money across the entire Procure-to-Payment (P2P) process.  If you would like information about a simple P2P efficiency review, we'd be happy to send a PDF brochure which summarizes our techniques.  Information can be requested at Info@StrategicProcurementSolutions.com

 

About the Author - Mark Trowbridge, CPSM, C.P.M., MCIPS is one of Strategic Procurement Solutions founders. His 30 years in procurement leadership began in the Manufacturing, Airline, and Financial Services sectors...culminating in a role leading three-quarters of the strategic sourcing activities, and all of the contracts management responsibilities, for Bank of America (then, the USA's third most-profitable company). During his final two years with Bank of America, Mark's areas of responsibility delivered a Quarter Billion Dollars in cost reductions. During the last 15 years, Mr. Trowbridge has worked in the consulting field with many leading corporate and governmental clients. His business travels have taken him throughout North America, Europe, the Middle East, and Asia. He is a frequent author on supply management topics, with articles appearing in publications like Supply Chain Management Review, Inside Supply Management, IFPSM's eZine, eSide Supply Management, and Strategic Procurement Solutions' own Best Practices in Supply Management Journal.  Mark's  is among the top 1% Most-Viewed LinkedIn profiles.

 

 

"As the World Turns - Reasons to Recalculate Offshore Relationships"... by Robert Dunn, MBA, C.P.M., Principal

Since the global downturn began in 2008, several primary cost drivers of offshore buying have greatly changed.  Examples of change include:

 

Oil Prices Have Dropped.  Crude oil prices (and the affected costs of gasoline, diesel, and aviation fuel) have dropped from $141 USD down $47 USD a barrel on March 14 (NYMEX listing).  This has reduced costs marginally for maritime, aviation, rail, and truck transportation.   

Labor Costs in Some LCC Areas Have Risen Dramatically. Labor costs in some regions that used to be considered "Low Cost Countries" have risen significantly.  For example, an article last year in the Wall Street Journal reported that skilled labor costs along the manufacturing coast of China (with cities like Beijing, Shanghai, and Guangzhou) have increased by 71% since 2008.  As a result, some businesses are beginning to relocate manufacturing operations to regions with lower labor and operating costs, including Vietnam, Indonesia, Central America, and Eastern Europe.

 

Military Conflict Is Interrupting Supply Chains.  Military action in several global regions is threatening to add complexity to global supply chains.  The recent civil turnover in Yemen potentially threatens maritime traffic passing through the Red Sea wherein 3.3 Million barrels of global crude oil are transported by tanker each day.  This passage leads to the Suez Canal and is the most-direct route for ships carrying cargoes between Europe, the Mediterranean, and Asia.  Worst case, insecurity about safe passage through the Suez Canal could result in Asia/Europe shipments being diverted around the Cape of Good Hope at the tip of Africa; dramatically increasing days in transit.

Reduced Energy Prices in North America Are Bringing Production Back to the Largest Global Market.  Major expansions of liquid gas and petroleum production in North America have begun to reduce energy costs being paid by manufacturing firms in the United States and Canada.  While skilled labor rates certainly remain high in these two countries, reduced energy costs are making manufacturing much more cost-effective in those two countries.  In fact, a 2012 survey by the Boston Consulting Group found that 37% of U.S. manufacturers with sales above $1 Billion said they were considering shifting some production from China to the United States.  New production facilities are even being opened up in North America by Chinese firms such as Lenovo.

So what do these types of trends mean for us in the procurement profession?  No matter where our organization is located, it may mean that it is time to open up Excel and re-crunch the numbers on our international supplier relationships.  Most cross-border relationships will continue to have merit, but some may need to be re-evaluated in light of trends like those in this article.

 

Strategic Procurement Solutions trains customer groups in marketplace evaluation techniques and TCO modeling in our Expert Strategic SourcingTM and Governmental SourcingTM onsite workshops (3 days each).  Our instructors also teach online eLearning courses on these topics.  Contact us for more information at 


 

About the Author:  Robert Dunn, MBA, C.P.M. is one of Strategic Procurement Solutions' founders.  His 40 years in procurement leadership covered management positions in the Government, Technology and Financial Services sectors; culminating in a role directing all of BankAmerica Corporation's procurement operations.  He has served as President of two ISM/NAPM affiliates, and taught supply chain management at the post-graduate level for California State University - Hayward and St. Mary's College - San Francisco.  He has also worked with major corporate and governmental clients in the consulting industry for the past 18 years, and was one of the founders of Strategic Procurement Solutions.   Robert has worked on major procurement initiatives in North America, Latin America, Europe, and Asia.  He is a noted author, with articles published in publications like eSide Supply Management and Strategic Procurement Solutions' own Best Practices in Supply Management Journal (the latter of which is now distributed to over 13,000 readers).

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