Getting More Out of the Supply Chain
Most buying organizations of any significant size will tell you that proper management of the supply chain is vital to the overall health – and survival – of their companies. They engage in a careful screening process to ensure they select the right suppliers. Ideally, those suppliers will not only provide the products and services they need to satisfy their customers, but will also engage in a streamlined invoice-to-cash process that reduces or eliminates unnecessary manual processes for the customer.
Understanding Accounts Receivable Processes
Buying organizations with tens of thousands of suppliers in their supply chains often rely on historical analytic data to better understand their suppliers. This understanding will hopefully lead to better decisions and more effective sourcing but is not very reliable when anticipating how a supplier will handle their accounts receivable (AR) processes.
Why is understanding a supplier’s AR process important to the buyer? The method by which suppliers submit invoices directly impacts the processes of the buying organization. While buyers often implement new technologies to streamline processes and pay their suppliers more efficiently, many of those suppliers are loathe to implement similar technology to streamline processes that ultimately impact the buyer. In short, suppliers say they want the benefits of automation and electronic in the areas of invoicing and payment but resist giving up the paper they’ve grown to rely on.
What 500 Supplier Organizations Prefer
To illustrate this dilemma, the 2017 Perceptions Study – Analysis of Invoice-to-Cash practices and preferences of supplier organizations, asks nearly 500 supplier organizations, of various industries and revenue size, what methods they use to submit invoices to their customers. Most suppliers (78 percent) indicate they submit invoices via email while 76 percent submit via paper. A much smaller percentage—38 percent—use electronic methods such as electronic data interchange (EDI) or third-party e-invoicing networks (24 percent).
While these figures may not seem alarming on the surface, the same suppliers were also asked to identify the most important aspect of submitting invoices. Virtually all respondents (90 percent) indicated that getting paid faster was the most important thing, 80 percent said getting the invoice delivered faster was important, while confirming the invoice was received by the customer was important to 78 percent of respondents. It’s telling that suppliers say they want the benefits provided by electronic and automation but most of them still use methods that do not facilitate those benefits.
This is also illustrated when asking suppliers how they are currently paid and how they prefer to be paid. A large majority (87 percent) indicated that they currently receive payment via paper checks while 72 percent indicate they receive payment via Automated Clearing House (ACH). When asked how they prefer to be paid, only 26 percent indicated they prefer payment via paper check and 59 percent had a preference for ACH.
Committed to Paper
This disconnect is further illustrated when suppliers provided written responses regarding why they prefer to receive paper checks and why they prefer ACH payment. Suppliers say they prefer paper checks because “it’s how we’ve always done it,” because of their old-fashioned values, or because they have a bank courier, they say checks are easier to handle, or that they are not set up to receive other ways.
Suppliers say they prefer ACH payment because payments clear quickly and it’s affordable, easier and faster; funds are available quicker; it’s more efficient from a cash flow perspective; and there is less chance of errant or lost payments and a better record of remits.
What does a buyer organization do, especially when they want to move suppliers to electronic and automated methods of invoicing and payment but those suppliers are reluctant to make the transition?
The first step is not just understanding that this disconnect exists, but understanding why it exists. While many supplier organizations are open to transitioning to electronic and automation, way too many are married to those methods rooted in 20th -century processes. Many professionals in supplier organizations have a comfort level with doing things the way they’ve always done it and are resistant to change.
Synergy Between Buyers and Suppliers
Buying organizations must, therefore, take a comprehensive, layered approach to transitioning suppliers to newer technologies and more streamlined processes. Rather than rolling out an initiative for suppliers to transition to newer processes within a three-to-six month window with a single, one-size-fits-all approach, buying organizations must identify three to five phases for bringing those suppliers along. It’s understandable that for those suppliers that have a comfort level rooted and solidified over several decades, transitioning them in three to six months may not be realistic.
If buying organizations take a comprehensive approach and slowly bring those suppliers into the 21st century, their organizations will ultimately reap the benefits of streamlined processes, greater efficiency and healthier cash flow.
Ernie Martin, founder of Receivable Savvy and chair of the Federal Reserve’s Business Payments Coalition Vendor Forum, is an expert in invoice-to-cash who has examined the hidden preferences of supplier organizations.