While most companies have separate organizations devoted to procurement and finance, ongoing digital transformation efforts are aligning these efforts to realize the benefits of cohesive source-to-pay strategies.
Source-to-pay integrates the functions of strategic sourcing, the requisition of goods and services, and supplier payment via accounts payable. The benefits of this approach – integrated spend management – have proven to be extremely valuable in 2020 and will continue to be in 2021 as organizations navigate shifting global trade dynamics, cash flow challenges, and massive changes in the workplace.
Stabilizing Global Trade Disruption with New Sourcing Strategies
In response to unprecedented supply and demand chain upheaval, organizations have revamped their supply chains to restore resiliency and stability. This has led to the deployment of next-generation sourcing strategies to source new qualified suppliers through online auctions and sourcing events, and leverage dual sourcing/multiple sourcing strategies and procurement marketplaces such as Amazon, among others.
Anchoring these strategies is source-to-pay technology which has enabled organizations to bring new suppliers onboard quickly while ensuring compliance and performance management controls are in place.
Restoring stability and resiliency in the supply chain requires agility, visibility, and control through the consistent application of best practices for supplier performance and risk management. Organizations need to understand the performance of their supplier base so they can standardize on the best performing suppliers moving forward.
Additionally, as the supplier pool changes, new fraud threats emerge. A host of new suppliers and new orders unwittingly subjects companies to greater fraud risk. Accounts payable automation assists with fraud mitigation by helping flag duplicate invoices while assisting with reconciliation by acknowledging inventory receipts via three-way matching. It also ensures consistent controls such as multi-factor authentication, which requires users to verify their identities with at least two types of credentials.
Digital Transformation to Free Up Working Capital
According to the 2020 CFO/The Hackett Group Working Capital Scorecard, the 1,000 largest U.S. companies had nearly $1.3 trillion in capital needlessly tied up in receivables, payables, and inventory – about 10% of their combined 2019 revenue.
As companies prioritize liquidity and cash flow, CFOs are focused on cash visibility and driving cross-functional working capital improvement efforts. They’re implementing digital transformation capabilities to automate collections and payables, working to improve forecasting, and seeking to optimize and standardize how they collect from customers, pay suppliers, and manage inventory.
Our own survey data shows many companies have changed supplier payment routines to manage cash flow and supply chain uncertainties in the midst of the COVID-19 outbreak. The data compared March through May 2020 with the same time period in 2019 showed many companies changed their payment behavior by either increasing or decreasing Days Payable Outstanding (DPO). This suggests that businesses are using the DPO metric to guide decisions on supplier payment procedures to adapt to the specific challenges caused by the pandemic.
Companies experiencing limited cash availability have increased DPO to manage cash flow challenges during the pandemic. Conversely, companies with a healthy cash position are paying suppliers early in return for discounts and/or to mitigate supply chain risk.
One added benefit of adoption of source-to-pay capabilities is that these functions are digitized – the gateway to automation, which in itself, can significantly impact the bottom line. Analysis from McKinsey & Company, a global management consulting firm, shows 56 percent of the tasks associated with the source-to-pay process are fully or largely automatable via technology, and that source-to-pay activities as a whole are well suited for automation.
The analysis found 88 percent of tasks can be automated in the placing and receiving of orders and 93 percent in payment processing. As well, 47 percent of vendor-selection and negotiation activities are good candidates for automation.
Using industry benchmarks which suggest that most organizations waste 3 to 4 percent of overall external spend on excessive transaction costs, inefficiency, and noncompliance, McKinsey estimates that for an organization with an annual spend of $2 billion, eliminating that leakage could add $70 million a year to a company’s coffers.
Look to the Cloud for Source-to-Pay Technology
Source-to-pay enabling technology is often cloud-based so no local data storage is required and users have access to information in real-time from their computers or mobile devices, regardless of time zone and location.
Working in the cloud ensures business continuity to keep businesses up and running, by safeguarding the data – the lifeblood of the business – against scenarios that threaten to disrupt operations.
The ability to access large amounts of data over a secure online network information and workflows to collaborate remotely is vital in the face of natural disasters – or during unprecedented scenarios such as the COVID pandemic.
These are unprecedented times, that will require organizations to make the necessary adjustments in their source-to-pay operations. Fortunately, technology can help organizations be more agile, adaptable, and strategic to navigate the “new normal” and what’s next.
About the Author
With more than 20 years of experience in source-to-pay solutions and generating operational insights grounded in data analytics, Shannon is vice president of product Marketing at Medius, a global supplier of cloud-based source-to-pay solutions. Over 3,500 customers and 450,000 unique users worldwide use Medius spend management solutions, managing transactions worth more than $150 billion annually.