Category Archives: Finance

You Should Never Pay Your Supplier Late … Unless

paying late is actually the right thing to do.

SI has said since day one that you should never pay a supplier late, and it still believes this, but the reality is that sometimes late is not late. So when is late not late? Simply put, when paying the supplier late hurts the supplier less than it hurts you.

The whole point of paying suppliers on time is to not only keep them financially sound, but to reduce the cost of your end-to-end supply chain. If your supplier depends on your business and needs that cash to buy raw materials, pay its workers, and fund its overhead costs, and it has to wait for that cash, then it has to borrow money to buy those raw materials, pay its workers, and fund its overhead costs. And if it’s cash strapped, chances are it’s not going to get a good rate. Furthermore, if it’s small, or doesn’t have an A credit rating, it’s not only going to get a bad rate, it’s at risk of getting a very bad rate. Some suppliers often have to borrow at 20% to 40% to stay in business while they wait for your payment, which sometimes doesn’t come until 120 days after the product has been provided to you. If such product takes 60 days to make and ship to you, that’s 180 days the supplier is waiting for payment and the cost has been effectively increased 10% to 20%. And who do you think is paying for that? You are!

However, sometimes we have the opposite situation – a buyer who is strapped for cash waiting to get the next product to its customers and a large supplier, who does business for a lot of large companies, that is in a relatively cash rich situation. In this situation, the buyer might be forced to borrow cash at a relatively high rate of interest, which could easily be 12% to 18%, while the supplier could go another 60 days without payment with no adverse effect. Paying the supplier on-time in this situation is ultimately as damaging to the supply chain as a whole as paying a cash-strapped supplier late. Anything that increases the cost ultimately increases the price to the end consumer. And anything that increases the price risks decreasing the customer base, and the overall revenue that keeps the supply chain going.

So, if you do have the opposite situation, despite the supplier’s grumbling, you should pay late. But ONLY if you have this situation, which, generally speaking, occurs less than 10% of the time. So how do you know if you have this situation?

Come back tomorrow to find out.

Is Your Financial Performance Lagging?

Even if it is not, you might want to consider BravoSolution’s and Basware‘s upcoming webinar on Five Untapped Methods to Improve Financial Performance. Hosted by Mickey North Rizza, former Gartner and AMR Research Analyst with over two decades of supply chain experience, you know that this webinar taking place next Wednesday, August 21 @ 11:00 am PDT / 2:00 pm EDT is going to be filled with useful information.

All you have to do is look at the statistics. Research has demonstrated that leading companies that improve their Purchase to Pay processes find operational savings that can exceed 40% and that those who also implement end-to-end Source-to-Settle processes (with smartly linked Sourcing and Procurement) see an average 14.6% increase in operating margin and a 12.8% ROIC (Return on Capital Invested). Given the increasingly low returns in cash-based investments, pursuing this opportunity should be a top priority.

It Took 40 Years, but BPOs (Bank Payment Obligations) are now Truly SWIFT!

SWIFT, formerly known as the Society for Worldwide Interbank Financial Telecommunications, and a global provider of secure financial messaging services, turned 40 on May 3 of this year, and that’s noteworthy on it’s own as this tells us that we’ve only been thinking about electronic financial transactions on a global scale for 40 years, but that’s not the most important piece of news to come out of SWIFT, which processes 90% of traditional global trade transactions, this year.

The most significant piece of news to come out of SWIFT this year, and this decade, is the fact two weeks later on May 17, two months ago, the electronic Bank Payment Obligation (BPO) for an open account transaction became an official financial instrument under the International Chamber of Commerce’s (ICC) Uniform Rules for Bank payment Obligation (URBPO). The URBPO, which is an element in the electronic matching of open account trade data, and which utilizes the ISO 20022 messaging standards, provides an irrevocable payment guarantee in an automated environment and enables banks to offer flexible risk mitigation and financing services across the supply chain to their corporate customers.

As defined by the U.S. Department of Commerce’s International Trade Administration in their Trade Finance Guide, an open account transaction, which is the preferred transaction type by most North American and European multi-nationals, is a sale where the goods are shipped and delivered before payment is due. This option, which is often the most advantageous to the importing buyer, is often the most disadvantageous to the exporting supplier, as they will have difficulty getting financing from their bank to finance the production and shipment of the goods until they are paid by the buyer without proof that they will be paid. That’s why many suppliers will insist on a Letter of Creditworthiness from the buyer’s bank, which will often need to be provided direct to the supplier’s bank. This paperwork takes time, especially since it has to flow through banks, slows down trade, and aggravates buyers who need to move fast to keep up with constantly changing customer demand. That’s why they insist on open accounts, even though the supplier’s bank may not accept them because the buyer, or the buyer’s bank, isn’t known (well enough) to the supplier’s bank, which is fair.

This is a situation that, theoretically, could be easily corrected with an electronic replacement for a letter of credit, that could move at the speed of light down a fiber cable, as the buyer’s bank, which can see the buyer’s ability to pay, can immediately send the supplier’s bank an electronic Bank Payment Obligation that the bank will pay when the goods are shipped and adequate proof has been provided. The supplier’s bank could then advance the supplier as it has a trustworthy bank obligation, and not just a copy of a purchase order (PO), from the buyer’s bank that it can rely on. And now that we have the ICC URBPO, this is finally a reality. And if you’re a multi-national, it’s a reality that’s at your fingertips!

All that is required to create a BPO is a purchase order and an acceptance by the supplier. All that is required to complete the BPO is a commercial invoice and acceptance by the buyer. No other documents are required.

The process is as follows, provided the buyer has an open account with a bank on the SWIFT network that is, or soon will be, URBPO enabled:

  • the buyer sends their PO to their bank and requests a BPO be sent to the supplier’s bank
  • the buyer’s bank delivers the BPO through the TSU (Trade Services Utility) operated by SWIFT to the supplier’s bank
  • the supplier’s bank delivers the PO to the supplier
  • the supplier accepts the PO and sends confirmation to their bank
  • the supplier’s bank delivers the confirmation to the buyer’s bank

and, voila, a valid BPO, which is irrevocable once all conditions are met, has been created. Once the terms of the PO have been completed in full,

  • the supplier informs their bank and provides the commercial invoice
  • the supplier’s bank informs the buyer’s bank that the terms have been completed
  • the buyer’s bank asks for confirmation from the buyer
  • the buyer confirms completion

and the supplier is paid! It’s that easy.

Since only banks have access to the TSU, it’s likely that you’ll probably still have to use e-paper to communicate with your bank if you’re a small or mid-size operation, but if you’re a large multi-national, you can work with an approved vendor (of which there are at least 6 and more in the process of being certified) to integrate your finance system into the bank’s SWIFT system and if you have an open account with the right permissions, automatically create BPOs within your transaction limit (and seamlessly submit requests for approval and conveyance with the click of a mouse), just as easy as you can do ACH payments and wires today with advanced business banking solutions from the major banks.

Of course, it goes without saying that you have to be a client of either the 6 banks that are currently live, the 10 banks that have implemented the capability and that are in the process of implementing their big clients, or the 50 banks that are adding the capability, but if you’re not, and you’re a major player in international trade, maybe you should be! e-Invoicing was e-Procurement 1.0. e-Payment was e-Procurement 2.0. But e-BPO/TSU is e-Procurement 3.0, and if you want to get to the next level, you have to get there.

If You Don’t Have Earthquake or Hurricane Insurance for Your Supply Chain

Get it now!

This recent graphic from Swiss Re that charts the amount of insured losses per year since 1970 clearly demonstrates that the bulk of losses were due to weather-related causes or earthquakes, with the biggest losses directly attributable to earthquakes and hurricanes. In the last forty-two years, only one year had significant losses not due to an earthquake or a weather related phenomenon, and that was the year of the September 11th attacks. Except for these attacks, losses from mad-mad disasters never exceeded 10 Billion, even in years where losses exceeded 120 Billion. So while it’s a good idea to have the standard insurance suite of fire, theft, and liability — where your supply chain is concerned, a natural (weather-related) disaster is going to be MUCH more costly.

The Cost of Catastrophes

SIM Powered Recovery Will Take Your Recovery to the Next Level!

Every year, corporations are at risk of losing significant dollars due to transactional errors such as: over payments, duplicate payments, missed rebates, missed discounts, lost credits, and fraud.

The money is lost with no chance to reclaim it unless a recovery audit is performed. Most recovery audit service providers claim on their websites and marketing material that they can recover between $500,000 and $1M per every $1B that a company spends on an annual basis.

Even under the most conservative estimates, this problem is costing mid-sized and large companies millions of dollars every year.

Unfortunately, the recovery audit industry relies heavily on manual processes which focus almost entirely on a client’s historical transactional records. Manual processes are time-consuming, inconsistent, expensive, and focus too heavily on client records. The methodologies, while they do add value, leave a large portion of the recovery opportunity unexplored.

Over the last several years, some service providers have developed technology-enabled recovery processes that are accurate, complete and deliver claims in real-time. Even more recently, some recovery solutions have seen the incorporation of a supplier information management (SIM) application and have drastically improved audit results.

The combination of recovery audit technology and SIM drives more supplier compliance, significantly out-recovers manual recovery methodologies and improves the organization’s working capital situation as a result of the recovery process. In addition, even when delivered separately from any recovery product, SIM is a powerful tool that offers significant benefits to a financial organization by driving lower costs, streamlining supplier on-boarding, reducing working capital, improving strategic supplier management and decreasing payment fraud.

To find out how SIM-Powered Recovery can improve your recovey results by a factor of 3, 5, or even 9, and maximize your return, download the latest Sourcing Innovation Illumination, sponsored by Lavante on Taking Capital Recovery to the Next Level. When you find out how you can save hundreds of thousands while recovering millions, you won’t be disappointed!