Implementing a Purchase to Pay System, Part One
By Daniel Ball, Wax Digital
Organizations seeking to cut cost out of their buying chains through Purchase to Pay (P2P) systems that automate time consuming processes between buyers and suppliers can realize significant savings. However, while the advantages can be significant, success is also reliant on taking your suppliers with you through the process of change.
Investing in supplier adoption and engagement is just as valuable as buyer adoption. Suppliers usually outnumber internal buyers several times over and they are more dispersed, less controlled and engaged. Ensuring the continuity of good relationships established sometimes over many years relies on suppliers knowing where they stand and how they will need to engage with you in the future.
Wax Digital’s recent Guide to Supplier Adoptionoutlines the best practice drawn from the experiences of our clients as they have invested in supplier management as part of their P2P transition. While challenges present themselves every step of the way benefits are also realized at the same rate. Supplier adoption should be considered from the initial choice of P2P system and its ease of use for external parties. Here are the first three steps to follow:
A suppliers’ size, sophistication and level of trade with your organization all influence how they should be approached through change and adoption. Pareto’s Law applies, in that the top 20 percent of suppliers usually account for 80 percent of purchase value, whilst the bottom 80 percent of suppliers account for just 20 percent of all purchases. Often the added problem is that these low tier suppliers also account for 80 percent of the supplier management burden.
The most sophisticated or largest suppliers usually have good systems and processes of their own and often take the lead role in the relationship. Their cost per transaction is typically very low with high levels of automation. As a result, this is not usually the main supplier adoption battleground.
Mid-tier suppliers generally need more management because they are larger in number and less connected to the buying organization. Despite this, there are no significant hurdles that consistent and effective communication through the process cannot overcome. Here, P2P actually adds clear value through tougher purchasing and supply standards, removing operational and process divides that exist between the purchase ordering function, purchase ledger, financial management, goods in and accounts payable.
But it’s the bottom tier bulk of suppliers where the adoption challenges really present themselves. Typically, small businesses perhaps serving individual departments or people in your company often fly beneath procurement’s radar and their lack of sophistication makes them difficult to manage.
Lacking processes and technology they create manual paperwork that makes transaction processing costs often greater than the monetary value of the purchase. Process efficiencies and cost saving benefits from P2P resonate most here, but so too does resistance to change, so they must be a key focus.
It’s a fact of life that a procurement change program or adoption of new P2P systems will result in some suppliers choosing not to come with you on the journey. Supplier rationalization is a natural and often necessary stage toward effective supplier management for both the buying organization and the suppliers.
Although supplier rationalization is part of the natural order and a valuable procurement tactic to drive costs out of the supply chain, it does need to be tempered with the realization that it is important to maintain supplier diversity to spread risk and to allow for the advantages smaller local suppliers can bring to the table.
Rationalization tends to be an ongoing part of the change process, rather than something can be signed and sealed up front. There is likely to be some streamlining needed at the outset when an initial data cleanse identifies lapsed suppliers and eliminates duplicate accounts, but it is once process change has been introduced that landscape starts to level out.
At this stage, it’s likely that around one quarter of your supply base will reject the changes you are trying to implement, signaling a limited interest and engagement in your business. It’s often seen that rationalization is a conscious choice made by the buying organization, but equally it may be the suppliers that decide it’s not in their interests to go through the process or effort of adopting new rules of engagement.
Once P2P is implemented rationalization, there should be an ongoing process as new purchasing data becomes available and the organization becomes aware of opportunities to consolidate contracts and spending in areas of inefficiency.
As Robert Louis Stevenson noted “talk...costs nothing in money. It is all profit. It completes our education, founds and fosters our friendships...”
With this in mind the next step is to ensure that the P2P implementation and its process effects are communicated clearly and consistently to suppliers. Before suppliers are informed, there must be a clear internal message mandating how future trade with suppliers will take place. This is the only way to ensure that everyone in the buying process communicates and works correctly with suppliers.
Implementing a new system and simply expecting suppliers to follow suit won’t work. Neither will making a high-level, strategic decision and failing to communicate it across the business. Rather, there needs to be a message that encapsulates all the goals that you are seeking to achieve and ensuring it is understood across the business so that suppliers hear it from everyone they come into contact with.
EU and US agree end to Airbus-Boeing supply chain tariffs
The EU and US have agreed to resolve a 17-year dispute over aircraft subsidies, suspending tariffs on billions of dollars' worth of goods that have plagued procurement leaders on both sides of the Atlantic.
Under an agreement reached by European Commission Executive Vice-President Valdis Dombrovskis and US Trade Representative Katherine Tai on Tuesday, the tariffs will be halted for a period of at least five years.
It will bring an end to punitive and disruptive levies on supply chains that have little to do with the argument, which became embroiled in the trade battle. Businesses on both sides of the dispute have been hit with more than $3.3bn in duties since they were first imposed by the US in October 2019, according the EC.
The US imposed charges on goods upto $7.5bn in response to a World Trade Organisation ruling that judged the EU’s support of Airbus, its biggest aircraft manufacturer, unlawful. A year later in November 2020, the EU hit back. The WTO found the US had violated trade rules in its favourable treatment of Boeing, and was hit with EU duties worth $4bn.
In all the tariffs affected $11.5bn worth of goods, including French cheese, Scotch whisky, aircraft and machinery in Europe, and sugarcane products, handbags and tobacco in America. Procurement leaders on both sides of the fence were forced to wrestle with tariffs of 15% on aircraft and components, and 25% on non-aircraft related products.
Boeing-Airbus dispute by the numbers
- The dispute began in 2004
- Tariffs suspended for 5 years
- $11.5bn worth of goods affected by tariffs
- $3.3bn in duties paid by businesses to date
- 15% levy on aircraft and 25% on non-aircraft goods suspended
Both sides welcome end to tariffs
European Commission President Ursula von der Leyen branded the truce a “major step” in ending what is the longest running dispute in WTO history. It began in 2004.
“I am happy to see that after intensive work between the European Commission and the US administration, our transatlantic partnership is on its way to reaching cruising speed. This shows the new spirit of cooperation between the EU and the US and that we can solve the other issues to our mutual benefit,” she added.
Both aircraft manufacturers have welcomed the news. Airbus said in a statement that it will hopefully bring to an end the “lose-lose tariffs” that are affecting industries already facing “many challenges”. Boeing added that it will “fully support the U.S. Government’s efforts to ensure that the principles in this understanding are respected”.
The US aerospace firm added: "The understanding reached today commits the EU to addressing launch aid, and leaves in place the necessary rules to ensure that the EU and United States live up to that commitment, without requiring further WTO action."
This week’s decision expands upon a short-term tariff truce announced in March this year. The EC says it will work closely with the US to try and further resolve the dispute, establishing a Working Group on Large Civil Aircraft led by each side’s trade minister.
Airbus last month signalled to suppliers that post-pandemic recovery was on the horizon, telling them to scale up to meet a return to pre-COVID manufacturing levels. “The aviation sector is beginning to recover from the COVID-19 crisis,” said Airbus chief executive Guillaume Faury, adding that suppliers should prepare for a period of intensive production “when market conditions call for it.”