Three steps procurement and finance must take together to reduce supply risk.
In the midst of a recession, monitoring the financial condition of a company’s supply base can be a bit like driving down a dark motorway at top speed as oncoming traffic comes at you in a flash. You feel every bump in the road but are moving too fast to anticipate them. Key suppliers can go bankrupt in a matter of days. Or another might cut corners because it can’t afford to maintain standards of the past.
Yet procurement and finance organisations can have no excuses for driving blind when it comes to managing supply risk. Equally unacceptable would be to develop a false sense of security by simply monitoring supplier credit ratings or bringing in analysts to run once a quarter (or even once a year) financial analyses on a supply base. Ratings agency Standard & Poor’s estimates that 60 to 75 European companies from its speculative-grade category could default on a total of €20billion to €25billion of debt in each of 2009 and 2010. Meanwhile, financing has largely dried up, often making it impossible for insolvent suppliers to restructure their debts and emerge from the crisis intact.
Executives face other risks to suppliers – particularly when their organisations fail to monitor supplier accreditations, certifications and standards. Consider the case of Primark, which was caught up in a UK sweatshop scandal. Procurement organisations alone will never be able to solve supply risk by themselves. But steps can be taken to mitigate risk. Firstly, accounts payable should be empowered to handle supplier relationships more efficiently. Secondly, internal auditors should be encouraged to better analyse supply risk. Lastly, visibility should be built into supplier metrics and key performance indicators
Empowering accounts payable
In many companies, accounts payable departments struggle to foster friendly and productive relationships with suppliers, thus driving up supply risk. A primary cause of these strained relations is that suppliers often see accounts payable departments as culprits when payments are delayed. But perhaps more importantly, suppliers are all too often left frustrated by being denied insight into the payment process.
Invoice automation can be the solution here. On the most basic level, automation creates a set of benchmarks and baseline information to track and share internally and externally. This ensures that suppliers are kept in constant touch with the timing of the payment process buyers in turn can benefit from early payment discounts thanks to faster processing times.
This helps procurement and finance to better manage working capital. Crucially, it also helps suppliers manage their business risk, consequently strengthening the buyer’s supply line.
Empowering internal auditors
Internal auditors, whether employees or consultants, are often weighed down by a raft of responsibilities including the efficacy of operations, the reliability of financial reporting, deterring and investigating fraud, safeguarding assets and compliance with laws and regulations. With such a broad charter, they often let supply risk fall even further down the list of areas to consider. This is a mistake.
Internal audit groups should play a key role in analysing the payables process and, crucially, the risk to supply. This should not just be seen as a procurement, finance or operations issue.
Supply risk touches all areas of the business from basic procurement to the outsourcing of shared services for IT, human resources and manufacturing. To highlight potential risk areas and help internal auditors, procurement and finance departments should work together to provide a purchase-to-pay platform that enables persistent monitoring of buying controls.
Meanwhile, to help auditors identify and reduce risks from non-compliance or fraud, companies should deploy invoices that match the delivered goods with invoices or contracts. They should also verify that a coded purchase order exists, document the verification of quality and inspection, and provide an audit trail of the process.
Outside of the purchase-to-pay process, procurement and finance should work together to help auditors certify that a company’s activities meet security, privacy and policy standards.
Performance indicators
To reduce supply risk at a time when suppliers can go from a financially healthy to precarious state in weeks, it is important for procurement and finance to look beyond lagging third-party indicators such as supplier credit data.
But what types of information and key performance indicators can be most effective? Understanding whether suppliers are taking discounts more often (and for what types of invoices) is often helpful, as is looking at payment-term renegotiations. Supplier banking information can also be telling, paying particular attention to relationships with at-risk lenders that could withdraw credit lines.
Non-financial information can be enlightening too. In fact, some companies use only supplier-performance and quality information – rather than financial or banking data – to predict supply risk. But most organisations will find that the combination of data from different systems with a specific focus on purchase-to-pay and payables data yields the greatest insight.
In this period of economic turmoil, companies that make full use of resources in tandem with technology can avoid being blindsided by sudden supplier bankruptcies and other supply risks. Finance and procurement collaboration should be an essential part of efforts, making use of accounts payable, internal audit and other finance team members. Together with an underlying purchase-to-pay technology platform and the right set of benchmarks, performance indicators and other supplier information, companies can reduce the odds of all types of supply risk.
About Basware
Basware is the global leader in purchase to pay solutions with more than 1,500 customers and 650,000 users in over 50 countries around the world. Basware solutions automate business-critical financial processes and deliver value by providing compliance and control, as well as fast return on investment. The solutions are distributed and implemented in Europe, the US, and Asia-Pacific through an extensive network of Basware offices and business partners.
In 2008, net sales reached EUR 86 million. Founded in 1985, Basware Corporation is a public company listed on the NASDAQ OMX Helsinki Ltd. Headquartered in Finland, it has seven subsidiaries in Europe and one in the US.
Source: www.dofonline.co.uk
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