Whether upgrading to the latest version of technology, or executing mergers and acquisitions, or even creating shared service centres for the purpose of making processes more efficient and effective, organizations are in a constant state of flux of change to gain market share, increase profitability, and streamline operations.

All of these changes can affect an organization’s bottom line, so it is critical to manage the associated costs closely.

For the success of an industrial setup, purchasing as a task is one of the most
crucial functions, as the profitability of the organization, to a very large extent,
depends upon the input material costs.

Procure-to-Pay or Purchase-to-Pay or P2P processes, which are at the core of company operations, are generally fraught with risk and inefficiency.

For the success of an industrial setup, purchasing as a task is one of the most crucial functions, as the profitability of a manufacturing organization, to a very large extent, depends upon the input material costs. The P2P processes involve all stages of a business’ transactions and are integral to overall efficiency of the enterprise. Organizations face a number of challenges with these processes that can affect profitability, compliance, and efficiency, including profit recovery, process automation, and process optimization. Every manufacturing company buys some material from outside and adds value in their manufacturing setup and then sells it to the customer. So far the experience has been that, depending on the type of the engineering industry, the procurement cost or the material cost can be to the tune of 50-65 per cent of the total cost base and hence, it has a very large impact on the bottom line of business.

There are large number of ancillaries and vendors who supply material to the manufacturing set up or the OEM, i.e., Original Equipment Manufacturer. These become ultimately the part of the business and the relationship moves from buyer-seller to partners-in-progress of the business. Therefore, it is absolutely necessary that the needs of the suppliers should be addressed in a very professional manner. This will happen in case there is a very smooth system starting right from procurement to payment.

Large numbers of organized sector companies are looking at the various elements of the P2P process to enable the organizations to reduce wastage of time and make it extremely responsive to the vendor so that his needs are met in a manner that enables him to create competitive advantage through their own cost reduction and success, thus enabling the OEM too to have a competitive edge over its competitors.

P2P is not only about procurement and receiving material, and then making payment for that, it is also carrying out the value addition activity at the vendor’s end together with the OEM for creating cost optimization…

Any additional cost or wastage actually gets added up in the ultimate cost of procurement. So it is a myth that it is not paid for by the OEM, it is paid by the supplier. The supplier will always build-in this kind of a waste cost into his pricing and ultimately the OEM pays for it. Hence, it is in the interest of the OEM to have a very smooth and transparent P2P process which is worked along with the suppliers, taking their inputs to minimize the cost of operations.

What Are The Key Ingredients To Enable A Streamlined P2P Process?

The key Ingredients to enable or streamline the P2P process requires complete transparency, integrity of decision making which should be based on logic and rationality, as well as visibility to the vendor in terms of internal processes happening at the OEM. In fact, the information should be available to the vendor to see his own financial status with the OEM to enable him to plan his working capital better.

P2P is not only about procurement and receiving material, and then making payment for that material. It is also carrying out the value addition activity at the vendor’s end together with the OEM for creating cost optimization where both the vendor and the OEM manufacturer work together including new techniques of manufacturing – as has been done by many Japanese manufacturers with their ancillaries, particularly in the auto industry.

Another important example would be that OEMs should train their suppliers and vendors in many aspects of business management and technology implementation which ultimately shall enable OEMs to get the benefits back into the organization. There are different ways of working around this, such as cluster approach, including second tier and third tier suppliers, working with them as a team, so that at every stage of value addition the optimization is seen through.

In the entire process, working capital management is extremely important and cannot be seen in isolation by either the OEM or by the vendor. It has to be looked at together for the best working capital management optimization. Together they may be able to work on a better working capital. If the payment is delayed, the cost to the supplier could be manifold, and many times more than the savings achieved by the OEM. A more informed system, in terms of payment, difficult scenarios, vendor credits can help supplier plan his working capital better. In fact today, a lot of new instruments have come in, such as Bill Marketing Scheme, Channel Financing Scheme, or getting Vendor Financing through Banks on the basis of the OEM’s financial strength. These instruments should be deployed in a manner that the advantage comes to both the supplier as well as the OEM.

Delayed Payment To Supplier – A Better Working Capital Management - Is It A Myth?

Relationship management is between two entities – the Vendor and the OEM, and here both the entities are clubbed together into a seamless process. That means that the vendor and the OEM are not treated as two separate entities, as it is not a buyer-seller relationship. They are, both working together to serve an objective and that is the final end product optimization for the customer. So more than “relationship management”, it is ‘working together’, that is most important.

Many organizations think that if the vendor payment is delayed, they can improve their working capital management. But it’s a myth, and it does not happen in reality. If they do not fulfil the promise or commitment made to the vendor, and do not honour the payment date agreed initially, they might actually be paying much more at a later stage in some other head.

For example, if there is a credit term of 15 days; the interest for 15 days is included into the price by the supplier. However, if the OEM is going to delay the payment, then the supplier does not know how much delay would take place. The supplier would then assume a huge number and try to hedge it, and therefore, the cost that will be included in the pricing will be much more than the actual billing cost. This will result in the OEM paying a higher price in their buying process and the buying decision.

Secondly, if the vendor, because of delay in the payment, has to go and borrow from the market, probably he will be paying 3-4 per cent interest per month rather than a bank financing of one per cent. If he is aware, he will get the money based on which his banker gives at one per cent, the additional cost of 2-3 per cent can be avoided and the benefit again gets passed on to the OEM by the supplier. But if he has to buy from the market, he will build it in the cost.

Hence, it is not the delay which is important; it is the honouring of the
commitment that is important.

Thirdly, in case the money is not available on time, then he is not able to buy his raw material, and he may have to pay a higher price to buy it. All these things that we think are benefits to the OEM and cost to the vendor, over a period of time will average out all the costs and be billed into the vendor’s pricing and the OEM will be paying at the end without understanding what they are paying for.

Hence, it is not the delay which is important; it is the honouring of the commitment that is important. If OEM cannot pay in-time, it is better to let the vendor be aware that it may take 90 days to pay. But on the 90th day, make sure the payment is made, and not delayed without assigning any reason or any time frame for payment.

How Can An Automated And Streamlined P2P Process Support Business Growth?

A streamlined P2P process can help organizations reap enormous efficiency savings to better manage the working capital. Organizations in today’s marketplace are facing an unprecedented level of global competition, uncertainty, and emerging risks that may impact both their financial and operational integrity. Managers are under increased pressure to meet regulatory demands while reducing costs and maximizing profitability.

In today’s high-risk environment, companies cannot afford to have rigid standard operating procedures or a status quo mentality. They need to eliminate the manual tasks of the P2P processes, and instead apply automation and more rigorous controls to effectively handle a growing volume of data while controlling costs.

With the Information Technology that is available today, the entire system should be automated as much as possible to reduce the human intervention. Apart from the speed achieved, it will also have an added advantage of error-free systems. Human beings can make errors, but if the systems have been automated, then the chances of errors are drastically reduced or minimized.

Another aspect is that logic gets built in the automated process. Different human beings can bring in personal biases which sometimes may not be very rational or may be conflicting in nature. Whereas in an automated system, the logic is first put down and its rationality is checked and then it becomes a repetitive process, ensuring that errors don’t happen and that takes it to a zero-defect process. Therefore, automation takes P2P to the level of ‘poka-yoke’ as a process.

To Conclude

Undoubtedly, P2P is a mission-critical process for every organization, enabling them to bring their unique value-add to suppliers’ goods and services. Enterprises will continually seek opportunities to not only drive efficiencies and improve profitability in their P2P processes, but also transform their supplier relationships to create new opportunities for competitive advantage and differentiation. Therefore, innovative ways should be deployed to make a very agile and responsive P2P process.

Technology, particularly IT should be deployed to increase the speed of transition, thereby reducing waiting time between transactions and eliminate consequent follow-up between suppliers and different functions of OEM. Thus, the final Mantra for success is ‘togetherness’.

ABOUT THE AUTHOR

Pravin K Purang has over 35 years of work experience and his areas of expertise and interest include TQM, BPR, QFD Techniques, Information Technology, Strategic Planning etc. He has presented several papers in national and international forums and has received several awards in Procurement and Supply Chain including British Chevening Scholarship, IIT Alumni Award, JGBS Top Rankers Excellence award. Fellowship from IIMM, Procurement Leader of the Year, Awards from Annual CPO Forum, India. Currently, he is a Management Advisor and Group Head, Procurement & Supply Chain Management at Jindal Steel and Power Ltd.

Pravin has been trained In Japan by JUSE (Japan Union of Scientists and Engineers) in TQM, Manufacturing practices and concluded Collaboration with Mitsubishi Motors for making Trucks in India. He has been the founder Chairman of OPJIT Engineering College. He has also been Member of the Steering Group of UP Technical University.