Most companies have separate organizations devoted to procurement and finance, however digital transformation efforts are bringing these departments together to realize the benefits of cohesive source-to-pay strategies.
Source-to-pay integrates the functions of strategic sourcing, the requisition of goods and services and supplier payment via accounts payable. The benefits of this approach – integrated spend management – have proven to be extremely valuable in 2020, as organizations have had to navigate shifting global trade dynamics, cash flow challenges and massive changes in the workplace.
Sourcing strategies to mitigate global trade disruption
In response to unprecedented supply and demand chain upheaval, organizations have revamped their supply chains to restore resiliency and stability. Companies have responded by embarking on new sourcing strategies to source new qualified suppliers through online auctions and sourcing events, dual sourcing/multiple sourcing strategies and by leveraging procurement marketplaces.
Source-to-pay technology has enabled organizations to execute on these new strategies to bring these new suppliers onboard quickly and ensure and performance management controls are in place.
Restoring stability and resiliency in the supply chain requires agility, visibility and control through the consistent application of best practices for supplier performance and risk management. Organizations need to understand the performance of their supplier base, so they can ensure they standardize on the best performing suppliers moving forward.
As the supplier pool changes, new fraud threats emerge. A host of new suppliers and new orders unwittingly subjects companies to greater fraud risk. Accounts payable automation assists with fraud mitigation by helping flag duplicate invoices while assisting with reconciliation by acknowledging inventory receipts via three-way matching. It also ensures consistent controls such as multi-factor authentication, which requires users to verify their identities with at least two types of credentials.
Getting crafty with working capital
Cash flow is a perennial priority for organizations, but research shows that organizations are now placing an even greater emphasis on freeing up cash.
According to a study from The Hackett Group, the 1,000 largest U.S. companies had nearly $1.3 trillion in capital needlessly tied up in receivables, payables and inventory – about 10% of their combined 2019 revenue.
Researchers say companies are making liquidity and cash flow a top priority. Chief financial officers are focused on cash visibility and driving cross-functional working capital improvement efforts. They’re implementing digital transformation capabilities to automate collections and payables, working to improve forecasting and seeking to optimize and standardize how they collect from customers, pay suppliers and manage inventory.
A Medius survey shows that many companies have changed supplier payment routines to manage cash flow and supply chain uncertainties in the midst of the Coronavirus disease (COVID-19) outbreak. The data, which compared March through May against the same time period in 2019, showed many companies have changed their payment behavior by either increasing or decreasing days payable outstanding (DPO). This suggests that businesses use the DPO metric to guide decisions on supplier payment procedures to adapt to the specific challenges caused by the pandemic. Companies experiencing limited cash availability have increased DPO to manage cash flow challenges during the COVID-19 crisis. Conversely, companies with a healthy cash position are paying suppliers early in return for discounts or to mitigate supply chain risk.
One added benefit of adoption of source-to-pay capabilities is that these functions are digitized – the gateway to automation, which in itself can add to the bottom line. Analysis from McKinsey & Company shows 56% of the tasks associated with the source-to-pay process are fully or largely automatable via technology, and that source-to-pay activities as a whole are well suited for automation.
The analysis found 88% of tasks can be automated in the placing and receiving of orders and 93% in payment processing. And, that 47% of vendor selection and negotiation activities are also good candidates for automation.
Using industry benchmarks that suggest that most organizations waste 3-4% of overall external spend on excessive transaction costs, inefficiency and noncompliance, McKinsey estimates that for an organization with an annual spend of $2 billion, eliminating that leakage could add $70 million a year to a company’s coffers.
Keeping up with new workforce requirements
Source-to-pay-enabling technology is often cloud-based, so no local data storage is required and everyone has access to information in real-time from their computers or mobile devices, regardless of time zone and location.
Working in the cloud ensures business continuity to keep businesses up and running by safeguarding the data – the lifeblood of their business – against scenarios that threaten to disrupt operations.
The ability to access large amounts of data over a secure online network information and workflows to collaborate remotely is vital in the face of natural disasters – or during unprecedented scenarios such as the COVID-19 pandemic.
Source-to-pay technology can also help organizations address other workforce requirements. Tech-savvy Millennials have grown up immersed in technology in all aspects of their lives. As a result, this demographic, which now accounts for 50% of the workforce, expects enabling technology to be in place in the workplace. They also are big advocates of greening processes for more sustainable operations. Deploying technology to streamline source-to-pay operations can also help organizations achieve these goals and become more attractive to the Millennial workforce.
These are unprecedented times, that will require organizations to make the necessary adjustments in their source-to-pay operations. Fortunately, technology can help organizations be more agile, adaptable and strategic to navigate the “New Normal” and/or what’s next.