Procurement process costs account for an average of 60% of turnover for most companies. There are two ways to explain this figure. On one hand, it highlights the considerable extent of savings that can be derived by optimizing 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.
1. 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 France’s case, the Observatory of Payment Periods notes in its 2018 report that “one third of all companies always pay their suppliers late, a proportion that rises with company size. Three sectors suffer structurally from late payments made by clients: construction, support services for businesses, information, and communication.” For the past several years, the average lateness of supplier payments in France has been around 11 days, which is slightly better than the European average of 13 days, but far from the most virtuous countries such as Germany and the Netherlands.
The result is that this inter-company credit system has become the main source of funding for companies in France, according to INSEE, representing about 600 billion euros in receivables. In other words, French companies owe more to their suppliers than to their bankers! And for good reason: supplier debt always costs less than liquidity credit. At least, that is how it seems. In fact, the ease and apparent savings derived from having suppliers fund working capital needs has a hidden cost: risk.
The first risk is financial. Over the past decade, lawmakers in France have increased mechanisms to encourage companies to respect their commitments in terms of payment periods and deadlines. Notably, a flat-rate penalty was introduced in 2013 for debt collection, followed by administrative fines potentially reaching up to four million euros (Hamon law in 2014, Sapin II law in 2016). Furthermore, statutory auditors now have a legal obligation to declare the payment practices of the companies they audit. Based on this information, the DGCCRF (General Directorate for Competition Policy, Consumer Affairs and Fraud Control) performed over 2,700 audits in 2018, leading to 377 fine procedures representing a total of over 29 million euros. Significant (and non-deductible) amounts that call for care.
In case of violation, another sanction provided for by law is to publicise the wrongdoing (“name & shame” principle). That is where the second risk for bad payers comes into play: risk to their reputation. This risk is far from being harmless, particularly in this day and age of social networks where information travels fast. A brand’s image is an asset that is both precious and fragile. Since this sanction was introduced, 61 organizations of all sizes and across all sectors have been caught. Some of them were targeted by press campaigns that were disastrous and very hard to erase.
Lastly, the third risk related to late payments is quite simply the risk of destabilizing 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. It is estimated that one quarter of all bankruptcies are the direct result of payments not being received on time. 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.
Managing the supplier relationship skillfully is therefore 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. The fresh climate based on trust resulting from this approach encourages suppliers’ commitments and enables the company to fully benefit from their expertise and innovation capacity. It is also a first step towards responsible policy as presented in the Charter for Responsible Supplier Relations elaborated by France’s Business Mediation public service and National Procurement Council. With its commitments, this voluntary approach invites companies to recognize 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 – and 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.
3. 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 department’s 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.
4. How to optimise this relationship?
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 efficiencyof their P2P process, gain strategic vision on business spendings and reduce the processing time and costs by up to 80%.
To learn more about this topic, discover the main phases of a purchase request processing cycle, all the way from order creation up to supplier-order-receipt invoice reconciliation.