Seven steps to supplier heaven
Friday, 30 April 2010

By Greg Kerwick

The recent global financial crises and resulting liquidity shortage have highlighted the importance of tightly managing working capital and with it, the day-to-day operating liquidity available to a business.

But how much can be done here is open to question. Even before the economic downturn, many companies focused on expediting the collection of receivables to improve working capital. With substantial gains already realized on the receivables front, companies have now shifted their focus to the payables side.

Initiatives taking place there run the gamut from straightforward efforts to get suppliers to extend terms to elaborately calibrated efforts to finance them. But how can a company maximize days of payables outstanding without creating supply chain risk?

Here are seven means to that end:

    1. Conduct a rigorous analysis of working capital metrics, such as Days Payables Outstanding (DPO). This can give you significant insight into the competitive dynamics within your industry group and enable you to quantify the potential opportunity of moving to median or best-in-class performance.

    2. Implement a working capital optimization strategy for each segment of your supply base. Not all suppliers are equal. Leverage and price sensitivity vary substantially depending on the supplier's strategic importance and volume with your organization. Different strategies and solutions may be warranted for each supplier segment.

    3. Offer a liquidity option to each supplier segment that fits within your optimization objectives. Best practice is to offer suppliers a liquidity option on every dollar of spend. Options include offering settlement via credit (often with revenue sharing) for non-strategic suppliers, supply chain financing (often with terms extension) for strategic suppliers and early payment discounts (with high rates of return ranging from 18 to 36 percent) for all suppliers in between.

    4. Analyze the impact automation tools can play in executing your working capital strategies. Automation tools should be leveraged for everything from supplier recruitment, electronic invoice receipt and terms extension to supplier visibility, supplier early payment requests and ACH or Card settlement.

    5. Consider integrating solutions from a single provider. Using one provider who can help you develop and execute an end-to-end strategy across your entire supply chain will provide the greatest opportunity to integrate solutions across supplier segments. It will also help avoid conflicts where strategies from two providers may overlap.

    6. Coordinate your objectives and approach within your own organization. To exceed your working capital goals, coordination is required across Treasury, procurement, finance and information technology. Today's best-in-class companies are building working capital objectives into the performance goals of each area to ensure alignment across their organizations.

    7. Don't rely on generic standards. There are enormous cash flow and bottom line benefits to be gained from an independent assessment of your organization against best practices, benchmark data and latest trends in working capital optimization. Work with your banking partner to develop a benchmarking assessment and recommendation for your organization.

Greg Kerwick is a managing director of JP Morgan.

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