May 28, 2009 — According to recent economic forecasts, the current recession may be deeper and last longer than originally estimated. During difficult economic times like these, procurement and finance are often joined at the hip, leaving no stone unturned in their effort to eliminate waste, control cost and do more with less.
Unfortunately, in many organizations, while these groups share a commitment to efficiency and savings, they often work in silos, each executing to the best of their ability in the hope that it all adds up to the greater good. In times like these, however, more must be done.
By eliminating divisional silos between these two critical backbones, organizations can improve visibility and control over spending and investment. Inter-departmental collaboration streamlines the entire process from sourcing to payment, for everything from raw materials to IT consulting services. This drives immediate benefit by reducing direct and indirect costs.
In today's economy, manufacturers, retailers and others dependent on supply chains face significant challenges. Overcoming these challenges requires a strategy that integrates financial and operational supply chains.
Asking the Important Questions
Operational and financial supply chains are inextricably linked: activity on one side of this delicate balancing act has short- and long-term implications on the other. A purchase order or bill of lading is issued whenever the purchasing department sources materials, or when goods are shipped to the customer; both of these events become triggers for some kind of financial action — a payment or an invoice.
There are four critical questions organizations can ask to determine where they can get more value from integrating financial and operational supply chains. The answers to these questions show the synergies across all areas — positive momentum in one area (finance or supply) has a positive effect on the other.
1. Am I doing everything possible to reduce cost?
When finance and procurement operations work together on this challenge, the biggest area of opportunity is control. Increasing the percentage of spend under management delivers tangible impact on controlling cost, including:
- New opportunities for volume-based discounts;
- Audit trails that define and track expected versus actual savings for better performance;
- Elimination of service charges.
2. How compliant am I?
- Lose thousands of dollars in rebates and rewards;
- Find that suppliers are less willing to negotiate because volume buying too often falls short of promises;
- See costs spiral out of control.
3. Are we using spend visibility across the organization?
- Better decision-making based on the realities of needs, opportunities and nice-to-haves across the organization;
- A solid financial foundation from which to make investments and changes for long-term growth;
- An agile model that allows the company to capitalize on profitable opportunities whenever and wherever they appear.
4. Am I doing all I can to improve efficiency?
- When payment processes are fully automated, companies gain immediate visibility into what's being spent, as well as who's spending it and where.
This on-the-mark insight means that supplier negotiations and the resulting terms are much more efficient: conversations can focus on getting the best possible price, rather than chasing discounts that are often never redeemed. The outcome: better supplier terms, stronger levers for performance and higher value on every dollar spent.
- Another example: when purchasing ships an order, the supplier issues an advanced ship notice (ASN). If the ASN is automatically copied to accounts payable, manual keying is eliminated, the process accelerated and errors reduced. In addition, there's an immediate opportunity to determine the value of capturing an early pay discount. While this seems obvious and simple commonsense, the reality is that it's much more likely to be the exception than the rule in most organizations.