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Best Practices in Procure to Pay Cycle: Supplier Perspectives – Part 3

The supplier responses to P2P problems by and large provide significant insights into the problems and complexities associated with improving the P2P cycle from a suppliers’ perspective.  Unfortunately, these issues also translate into significant problems for the purchasing company, which is often lost in translation when the need for P2P improvement is communicated to a senior management team.

An important component to consider in making an argument for improvement to the P2P process is the “Cos
t to Serve” of different customers from a supplier’s perspective shown in Figure 6.  As shown in the figure
below, “Cost to Serve” is an important component of developing aligned strategies between customers and suppliers.

 

 

Figure 6:  Cost to Serve Model

 

Suppliers will seek to align with customers that may have a high cost to serve, but are willing to pay for the service provided through improved responsiveness.  In addition, customers that have lower requirements may not require the same level of demand attention, when there is a good match with general capabilities.  However, teams should re-examine strategies for low margin customers that are aggressive and low margin, and question whether these customers are a good match.

 

Late payment and excessive workaround to obtain payment in a timely manner will definitely increase the cost to serve for companies with a “broken” P2P process.  Some of the typical problems that can occur when a malfunctioning P2P process is not fixed include one or more of the following events:

 

    • Deteriorating response time from suppliers, who have no motivation to improve performance and respond quickly to a customer who fails to pay them for 90 days or more.
    • Lower service levels from suppliers, who may choose to service their more profitable customers first in their Cost to Serve Model
    • Deterioration as the “Customer of Choice” in the mind of suppliers’ senior management, which further breaks down trust and strategic alignment
    • Delivery delays
    • Higher pricing due to the cost of money that is attributed to late payment and excessive manpower allocated to the account
    • Increased manpower on non-value added activities (e.g. chasing payments) to the detriment of other value-added activiti
      es that can improve customer service
    • Loss of the supplier as a critical link in the supply chain
    • Higher costs internally for the purchasing company, who must also dedicate AP people and buyers to non-value-added activities

 

 

Additional validation of these insights were also required to understand if best practices form other industries were relevant as well.