EDITOR’S NOTE: The following is part 2 in a 4 part series by cloudBuy’s Nilesh Gopali that has been published in the Brokers Forum of India magazine. You can access part 1 in the series through the following link; July issue, page 26 for article part 1 of 4
In my previous article Connecting the dots between eCommerce innovation and a robust economy, I discussed how the eCommerce evolution was having an impact on the overall Indian economy.
In today’s article, I will drill down further to provide you with a better understanding of the mechanics of this impact by examining more closely the buyer – supplier relationship in the emerging B2B world.
The exciting developments that are taking place in the Indian automotive industry, is the perfect starting point for this focus. Specifically, the relationship between the country’s top 750 auto manufacturers and parts suppliers, and the thousands of small enterprise suppliers.
The auto manufacturers are the buyers from the tier 1 suppliers, represented within the above referenced 750 main players in the auto industry. The tier 1 suppliers then assume the buyer’s role when dealing with the smaller supply entities. This means that they serve as the connecting point between the country’s vast small supplier pool and the auto manufacturers themselves.
It is therefore critical that this relationship chain as I will call it, is both streamlined and strengthened. Especially in terms of removing the potential bottlenecks that can hinder the procurement process.
Time To Pay: The Origins of A Disconnect
From a historical perspective, one of the most significant points of congestion has been centered around the timely payment of invoices and the subsequent impact on working capital.
According to a Chartered Institute of Management Accountants study, extended or late payment issues are a perennial problem the world over.
The average length of time it takes a plc to pay its suppliers in the UK is 44 days. Approximately one fifth of listed companies take more than 60 days and, an albeit small but notable percentage take more than 200 days to pay.
A Dun & Bradstreet report also suggests that the larger the company, the longer suppliers have to wait for their invoices to be settled. This is demonstrated by the fact that in Australia for example the average payment period “across all industries” is 55.8 days. Companies with more than 500 employees take 62.7 days to pay their invoices.
As a point of reference, large buying suppliers in the Indian automotive industry can take between 60 to 90 days (or longer) to pay the smaller supplier invoices.
Late Consequences: The Weak Link
In North America, the 2014 Annual Automotive OEM-Supplier Relations Study clearly shows the negative impact that a congested payment process has on buyer – supplier relations.
Each of the Big Three automakers in the United States saw their score in terms of supplier relations drop as a result of slow payment issues. The problem areas that were identified included paying invoices on time, paying accurately according to initial payment terms, resolving payment disputes, and the time to resolve payment disputes.
Beyond the obvious financial implications, the study reported that there was a significant and added benefit for manufacturers with the best score. Specifically, those automakers that had a positive relationship with their suppliers were able to offer the “best products at affordable prices.”
Beyond The Financial Impact: A Broken Chain
The longer it takes for an automaker, in North America, to pay an invoice, the greater the pressure on a supplier’s operating line of credit. This is because when calculating the Line of Credit – especially for small suppliers – financial institution financing usually only takes into account amounts owed to the supplier that are outstanding no longer than 90 days.
For this as well as other reasons, expert and Sr. VP Institute for Supply Management Bill Michel, asserts that there is the need to “lean out” the supply chain in order to “eliminate waste and true cost.”
In a Supply Chain News interview, Michel’s stressed that “without attacking the real cost, the (auto) industry will remain uncompetitive to the international competition who do take a cost-based approach.”
This means that buyers truly have to “work with suppliers to attack cost while keeping supplier margins healthy.” This is a somewhat contradictory philosophy to the traditional thinking associated with what Michel’s calls the competitive leverage approach where suppliers are “only as good as the last price.” In the end, Michel’s believes that it ultimately provides a competitive advantage to the buyer organization.
Even though Michel’s was talking about the North American auto industry, his points still apply in a globally competitive marketplace. This fact should not be lost on the indigenous Indian automotive industry. The reason is that India will see, with increasing frequency, the introduction of supply sources outside of the country. This means that ensuring the ongoing financial strength of the smaller domestic suppliers is critical to maintain a strong and reliable domestic supply chain.
In demonstrating the importance of a strong domestic supply presence Michels, in an interview with Procurement Insights, pointed to the collapse of General Motors.
At the heart of the “wreck” that what was once the GM supply network, was the “drive on price reduction, low cost country (LCC) sourcing, and extension of terms.” All of these led to what Michel’s referred to as the “collapse of the domestic automotive supply chain.”
Michels went on to say that GM’s former VP of Procurement and Supply Chain Bo Andersson’s hard line approach might have been “a short term win for GM.” However it created “long term supply chain problems and risk.”
This conclusion certainly confirms the results of the earlier mentioned 2014 Supplier Relations Study. Specifically the emphasis that through positive relationships with their suppliers, auto manufacturers are able to offer the “best products at affordable prices.” Without a strong domestic supply base, such as what occurred with GM, this becomes infinitely more difficult to achieve.
In this context, the streamlined Purchase-2-Pay or P2P process associated with eCommerce platform’s such as cloudBuy’s will play a key role. This is due to the fact that it will facilitate the needed collaborative framework that produces the positive relationship between buyer and supplier in terms of deliverables as well as from a financial perspective.
It will also address challenges within the process flow itself.
Improved Process Flow: A Promising Tomorrow
Errors related to Purchase Orders including invoice variances have delayed the payment process while creating added cycles for Accounts Payable (AP) departments. This is a major problem, the effects of which ripple throughout the entire supply chain. In fact one research article indicated that “defective invoices” actually accounted for close to “63 percent of all past due payments,” taking on average “two to three times longer” to be settled than clean invoices.
Think about the financial implications associated with such inefficiency. Also consider the impact on buyer – supplier relations, and the ultimate impact on the entire manufacturing process.
This is one of the reasons why so many have paid great attention to the results of the previously referenced U.S. auto industry study. Especially in relation to the downstream effect on liquidity associated with process challenges and their effect on the viability of the entire chain.
The best way to avoid these scenarios, is through a real-time transactional engagement between buyer and supplier which is only possible within a eCommerce B2B platform.
The benefits of such an engagement are both notable and immediate. Specifically the elimination of the number of defective invoices and the resulting “ability” to pay the supplier on time or earlier, thus enabling the buyer to capitalize on early payment discounts from suppliers. It is also important to recognize the potential savings that can be achieving through a reduction in the cost of funds.
It was for reasons such as these that a recent Forbes article heralding the end of paper invoices, stressed the importance of eCommerce platforms, and in particular E-Invoicing.
Besides driving the needed process improvements, “electronic invoicing firms, B2B payments and financial institutions” are stepping in to close the “payment gap” through the use of vehicles such as Purchase-Cards.
While the utilization of Purchasing Cards in and of itself is not new, their “integrated” role within the framework of a cloud-based B2B platform such as cloudBuy’s, has changed the game dramatically.
According to a recent article in the Indian Institute of Materials Management, “B2B e-commerce is an extension of existing business processes using the Internet as a channel.” While exciting, the article cautioned that even though this “allows for efficient interfaces between trading partners and more effective use of data, it is incomplete without integrated payment processes.” However, the author concludes that “By using the Purchasing Card and online payment software, traditional business purchases can be made just as easily online.”
The benefit for the buyer is that they improve their standing with suppliers ensuring optimum delivery performance. It also eliminates the bottlenecks associated with an inefficient AP system.
The benefit for the supplier – especially SMEs – is that they will no longer feel the negative impact resulting from process inefficiencies. Neither will they have to solely bear the financial fallout of large buying organizations looking to improve their own working capital position by delaying payments.
In the end, it is a true win – win scenario, and one that is only possible through the advent of the B2B eCommerce world.
All this being said, the influence of what is being sourced and procured also comes into play.
In part 3 of this series, I will discuss the variable strategies associated with the purchase of both Direct and Indirect Materials. This will include the impact that eCommerce B2B platforms have and will continue to have on traditional purchasing practices.
NOTE: You can follow this series and related discussions through the hashtag #BrokersB2B