In a world of constant change, risk is actually a form of safety, because it accepts that world for what it is. Conventional safety is where the danger really lies, because it denies and resists that world. – Charles Sanford
I’m often surprised when the Procurement or Supply Chain functions are not a central player in cash flow and working capital efficiency initiatives since they control 2 of the 3 levers of operating working capital (inventory and payables). Understandably, most organizations have focused on inventory instead of payables because extending supplier payment terms can have a negative impact on total supply chain costs and risk. Today however, many organizations are taking a different approach. They recognize that a more thoughtful strategy around supplier payment terms, one which utilizes benchmarking and collaborative tools like SCF, can yield significant working capital and cash flow improvements. Unilever is one such organization. An article in CPO Agenda looked at some of the things Unilever’s first CPO, Mark Engel, has done to develop the CPO function at Unilever. According to Mr. Engel we looked at our peer group in early 2009 and discovered that we were only in the middle pack when it came to payment days. We set a clear target saying that we wanted to be in the top third and launched a two-year programme to achieve this. This had never been very much on the radar for Unilever so we’ve made good improvements. In 2009 we achieved an advance in trade payables of 10 days. We’re halfway through the programme and will continue to drive this until we are in the top league of our peers. We looked very carefully at where we could push very hard and where we needed to go slow. We started by saying where we thought the payment terms should be and looking at what the average payment terms were, then we entered into negotiations. Mr. Engel has it exactly right. Payment terms need to be determined based on some objective measure, be it inventory days, industry averages, commodity class averages, etc. They should not be determined on an ad hoc basis, for example, just pushing all suppliers out 15 or 30 days. At PrimeRevenue we use a number of tools, including industry and commodity class benchmarking, to help our clients determine the best payment terms for each supplier group. Developing a best in class approach to payment terms is not a new idea. Getting there without increasing cost and risk in the supply chain is though, one that’s being supported by Supply Chain Finance.
Published October 8, 2010