Purchasing and Accounting: a Scorecard Issue?

[Pat Lupica]

Is a disconnect between purchasing and accounting impacting your supply chain scorecard?

One of the easiest ways to damage a buyer/seller relationship and not even know it’s happening is to toss an invoice over the wall to accounting and assume terms will be met. Payment terms are oftentimes stretched to preserve short-term cash reserves; sometimes breach of contract occurs because of accounting polices that are in conflict with contractual commitments.

There are very interesting relationship dynamics between Buyers and Suppliers. What makes it interesting is that the dependence pendulum shifts back and forth. The relationship could be described as symbiotic, which means that the relationship between two parties is mutually beneficial and one where the two entities rely and need each other to survive and prosper. Now of course, the degree of “need” varies, but the pendulum can shift unexpectedly, and when it does, it comes down to credit; the funny thing about credit is that you never know when you might need a good score. So the best practice is to keep a high score, or a high level of integrity at all times, which means meeting commitments.

I came across an interesting blog by Rakesh Shukla on this subject; below is a clip where Rakesh offers the downside of stretching payments.

So What are the Downside Risks of Stretching Payments? [1]

The upside of stretching payments is obvious - you get to hold onto cash for longer. Since the days of easy credit to help fund operating expenses is over, you don't want to run the risk of running out of money. Keeping cash for as long as possible has clearly become a strategic financial priority.

So what are the downsides - the "opposite reactions" - of stretching payments? Here are 7 HUGE risks:

1. Higher Prices: Suppliers are NOT Banks. Suppliers will notice when shamelessly used as a no-interest loan source. Late payments may undo the favorable prices negotiated by purchasing. Vendors may simply raise prices to cover the costs of financing tardy invoice payments.
2. Supply Chain Disruptions: Late payments may result in delayed shipments of goods and services. If these delays adversely affect your core business, is it really worth the hassle? If your finely-tuned supply chain is a competitive advantage, paying suppliers late may be like shooting yourself in the foot.
3. Poor Quality and Service: Slow pay will probably mean poor quality and service. Responsiveness will plummet since what supplier is going to jump through hoops if they aren't getting paid? Suppliers know who pays quickly and who doesn't. When deciding who to help and who to delay, the answer will be clear.
4. Second-Tier Suppliers: Having top-tier suppliers is a competitive advantage but you put that top-tier supply chain at risk if you abuse your suppliers' cashflow. The cash-rich suppliers that don't need your business will drop you for more profitable customers and you will have to go to your second choice supplier or the cash-starved suppliers will go out of business and be replaced by your second choice supplier. Either way, you risk losing your first-class suppliers and replacing them with second-rate suppliers.
5. Competition Suffers: In this environment, banks are not taking one iota of risk by lending to small suppliers. If you exacerbate the problem by paying late, you may be driving a good supplier out of business. In the end, there will be fewer suppliers left to compete for your business. How is this good for your supply chain?
6. Vexed Vendors: More gripes and kvetching from disgruntled vendors will lead to more disputes. This will suck the productivity out of your AP staff.
7. Duplicate Payments: As Mary Shaeffer points out in her newsletter today, you could be making your cashflow situation WORSE by paying late. Why? Unpaid bills lead to duplicate invoices being sent by nervous AR departments. If you pay these duplicates, you are obviously making your cash situation worse!

The bottom line is this: Newton was a smart guy so pay attention to his 3^rd Law of Physics: "For every action there is an equal and opposite reaction."

A supply chain is only as strong as its weakest link, and often times, that weak link is internal. Typically, the most notable disruptive internal disconnects are between sales & marketing and operations, but accounting can cause its own irreparable damage. Just as sales & marketing and operations must be on the same page, so should accounting. The accounting group must be aware of their role in the supply chain and the negative impact to the supply chain if financial commitments are not met. That said, being “aware” is not enough. The next step should align accounting policies and practices with the supply chain strategy so that disconnects remain closed. Lastly, it might be a good idea to find out what your scorecard grade is today, and establish criteria and a process to maintain a certain level of performance within your supply chain. Once all of this is done, it’s all for nothing if terms are not openly communicated to trading partners upfront. So in review, agree and align internally, establish scorecard criteria, and then communicate externally as a matter of routine.

The next time you have an urgent need, keep in mind that suppliers also keep scorecards, which are carefully considered when allocating capacity.

Pat Lupica, BLOGs

www.lnkconsulting.net">LNK Consulting
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Pat Lupica is an Academic and President of LNK Consulting, a value chain integration company that specializes in removing silo-centric performance barriers that inhibits supply chain alignment.

If you or your organization finds itself with concerns regarding people, process, and technology call a Supply Chain Expert. Supply Chain Experts can help your organization find unique solutions to supply chain challenges that can help you improve your bottom-line, competitive position, and overall customer satisfaction.

[1] http://blog.170systems.com/bid/10397/7-HUGE-Risks-of-Stretching-Inv..., accessed 9/29/09