Imagine the loss of revenues airlines would suffer if they didn’t modify their fares based on demand for seats. That’s the same paradox facing organizations that don’t differentiate payment terms based on what they are buying or the amount of the purchase. Thankfully Supply Chain Finance (SCF) planning can help organizations optimize payment while creating benefits for both buyers and suppliers.

SCF functions are becoming an increasingly critical corporate function to ensure liquidity, optimize working capital and achieve long-term viability of the supply chain.  PayStream’s research has uncovered that best-in-class organizations have learned how to manage the delivery of liquidity to the supply chain while capturing new discounts.  Before diving head first into a SCF program, initiatives need a framework to ensure that programs are approached on a strategic basis that bridges the supply chain, treasury and finance organizations.

SCF is a business strategy that optimizes working capital and supply chain collaboration by seeking tailored payment terms for services and materials.  SCF includes purchasing cards, structured financing programs and early payment discounting for supplier payments.

Unlocking SCF through Supplier Terms Analysis
Leaders in Purchase-to-Pay (P2P) utilize tools and analysis to optimize supplier payment terms based on the value of the supplier relationship and the value of the purchases. For instance, its quite common that organizations offer different terms for commodities under contract than utilities. Have you considered what your terms should be for accounting and legal services? How about IT Hardware? Transportation? The lesson: While most law firms have a high propensity to offer an attractive discount, accounting firms and IT contractors do not. Because they have developed a SCF framework, SCF innovators are routinely able to:

• Find the best terms for all suppliers, not just those under contract.
• Learn where Purchasing Cards (P-Cards) have the best fit without increasing costs.
• Capture increased early payment discounts, especially for spend not under contract.
• Inject liquidity into the supply chain.
• Free-up working capital for deployment to more strategic investments.

Payment Terms Refresh
PayStream’s research reveals that only 32 percent of organizations have a terms policy that is monitored and enforced. While most organizations have standardized terms, we also routinely find wide variability in the application of payment terms. The cause? Lack of a clear policy and lock-down of controls of who can negotiate and/or change terms in the accounting system.

PayStream has coined Payment Terms Refresh as the development of basic terms policies together with decision grids used by buyers and purchasing agents when they are setting up new suppliers. What are the benefits of a Terms Refresh? Our studies have revealed there are three top benefits for the buyer:

1. Allows companies to extend the payables cycle in a manner that adds value to both parties in a trade agreement.
2. Buyers maintain cash liquidity longer and achieve a more stable supply chain, while sellers gain faster access to lower-cost cash and enjoy improved business continuity.
3. Cash forecasting effectiveness is enhanced and buyer-seller relationships are strengthened

Creating a Vision for Supply Chain Finance
To achieve the long-term value of Supply Chain Finance (SCF), organizations need to adopt a strategy involving Procurement, Treasury and Finance, and initiatives should be approached at an enterprise level. PayStream’s Supply Chain Payments study research shows that many enterprises are still implementing components of SCF programs, not truly integrated projects.

Visioning starts with an assessment of the overall Supply Chain Finance value proposition. The responsibility for creating the SCF vision clearly lies in the CFO & Treasury suite. The most fertile environment is one in which the chief finance officers understand the metrics and drivers of SCF and is receptive to new ideas and ways of establishing terms. The SCF vision must be well-known and accepted throughout the enterprise and the supplier base. In order to achieve acceptance, all the stakeholders need to have a clear understanding of the benefits and potential risks. With this in mind, it is useful to have a meaningful, dialog and develop company-specific definition of goals.

Key benefits of SCF programs include:

• Segmentation of the supplier base to differentiate strategic from standard suppliers;
• Payables terms management;
• Supplier control over payment timing and scheduling for special classes of suppliers;
• Third party funding for early payment;
• Flexible payment schedules to reduce risk of supplier failures.

Eight Building Blocks of SCF
Following an analysis of more than 20 manufacturers, hospitals, utilities and universities, PayStream Advisors has created a SCF framework called “The Eight Building Blocks of SCF” to help innovators craft a vision for increased discounts and to make their business case and plan their implementation. The framework can be used for internal education and foster discussion in crafting the SCF vision developing day-to-day tactics. The build blocks are designed to be basis of an assessment of the enterprise’s current and required SCF capabilities and help organizations articulate Supply Chain Finance and Discount Management strategy.

The Building Blocks framework emphasizes the need to create a balance between the requirements of the company, suppliers and working capital. The Eight Building Blocks include:

1. Metrics Driven SCF vision and strategy
2. Integrated initiatives to capture supply chain and finance collaboration
3. Discount capture goals
4. Working capital compression goals
5. Invoice visibility processes
6. Automated payments
7. Supporting technology
8. Measurement & improvement metrics

Integrated SCF is an enterprise wide initiative, where the managers uncover how they want to manage working capital and supplier interactions and place all relevant capabilities in place to achieve those goals.  The framework ensures that SCF programs are approached on a strategic basis that bridges both supply chain and finance organizations. Just as a map helps you understand the context of your journey and the roads you need to navigate, the SCF framework helps organizations make decisions about the best route and objectives for their situation.

Leaving money on the table
After conducting supplier terms and payment analysis at dozens of companies, one thing is painfully clear.  Very few organizations have optimized their payment terms and worse don’t know how much they are leaving on the table. Optimizing your firms SCF opportunity requires an alignment of resources, measurement of the correct metrics, and terms development, depending on the correct segmentation of your supply base.  Don’t torpedo your opportunity to strengthen supplier relationships without analyzing your terms yield and SCF options.  Airlines have mastered yield management and SCF innovators are rapidly learning how to maximize opportunities in supply chain payments using the same techniques. Get on board and enjoy the flight.