This article is reprinted/republished by the express written permission of IOMA (The Institute of Management & Administration). ©2010; for more information about IOMA publications visit www.ioma.com

 

AP, like all other corporate departments, has cut costs to the bone—but managers are expected to find even more savings. Where do you look? Under a rock? No, try the master vendor file—as one AP manager discovered.

 

Here’s the Story

The CFO asked the AP manager (who asked to remain anonymous) to try to squeeze more money out of AP. The CFO first suggested just paying the bills slower, but he was afraid this would antagonize the company’s suppliers—and the AP manager agreed with this opinion. So she had to think of something else.

She began by reviewing the invoices that had been paid in the last three months and then looked at the purchase orders written during the same period. One thing became apparent right from the start. The company had numerous suppliers, and many seemed to be selling similar products. There were quite a few small orders, each involving an enormous amount of backup and an individual payment. She noticed that the amount of backup required did not increase in proportion to the number of items purchased on one invoice. One invoice could handle many different items.

The AP manager remembered her CFO’s concern over the possibility of antagonizing suppliers. Since she knew very little about their suppliers, she called the chief purchasing officer (CPO). He was a bit surprised by her request but agreed to meet with her. At the beginning of the meeting he seemed a bit standoffish. She explained the reason for her research and her findings. The CPO was upfront about wanting to keep as many suppliers as possible. He told her that many years ago he had relied on only one supplier, and when that supplier folded suddenly, he was left in the lurch. He’d almost lost his job over that debacle.

When the CPO realized that she wasn’t questioning his decisions, he hesitantly agreed to work with her. She wanted to see if it were possible to reduce the number of vendors while increasing terms.

The CPO was concerned that by asking suppliers to extend terms past the "normal" 30 days, he would be bucking industry trends and would antagonize the suppliers. But the AP manager knew he would have this objection, and she had brought with her Dun & Bradstreet industry norm figures showing that, on average, collection time for those in their industry was 50 days. This extra 20 days could not be explained away by mail or processing float. When the CPO realized that they were paying much faster than their competitors, he became quite interested.

 

What They Did

After reviewing the numbers the AP manager presented, the CPO agreed to try to reduce the number of suppliers the company was using. He evaluated suppliers that offered basically the same products and selected three that he felt were the best. He decided the company would concentrate its buying activity with these three suppliers if it could negotiate more favorable terms.

The three suppliers were approached with the promise of larger, more frequent orders in exchange for extended terms. Additionally, they were assured that they would be paid on time. In one case, an extra quantity discount was negotiated.

The suppliers saw many benefits to this new setup. Not only were they pleased with the additional business, but the promise to pay on a given date was a plus. Since these were large orders, this would help their cash-flow forecasting. However, one supplier demanded to be called if any payment would be late. Although at first it seemed like an unreasonable request, it was agreed to do so on payments in excess of $35,000.

 

Benefits to Payer

When the AP manager calculated the effect of this new program on AP, she found, on average, that payables had been extended five days. This resulted in a $75,000 savings to the company, which paid approximately $70 million worth of invoices each year (excluding payroll).

Another benefit was that the AP manager improved her relationship with the purchasing department. Purchasing and AP had always been at odds—as they are at many companies. Now, with this success behind them, AP and purchasing agreed to work on a procedure to get purchase orders to AP on a more timely basis.

Finally, since there were fewer (but larger) invoices, the number of transactions processed each month decreased.

 

Tips for Success

The AP manager will be the first to tell you that her project was not a piece of cake to get up and running. She had to overcome the initial resistance from purchasing and remove a number of smaller vendors as suppliers (two of whom called the CEO to complain). She offers the following advice to those contemplating similar actions:

• Review your own data (in this case, both payments and purchase orders) in order to identify your problem areas;
• Look at industry norms and compare your information with them—you may discover that you are actually paying slower than the rest of the industry, in which case you might decide to drop the idea;
• Try to understand the other person’s problem (as soon as the CPO explained what had happened when he relied exclusively on one supplier, it was easy to come to a compromise);
• Communicate with your vendors because many of them complain that not only are they paid late, but they are not informed;
• Find out what’s important to your suppliers (for example, the information for cash-flow planning purposes is of vital importance to many suppliers); and
• Live up to your promises—if you run into difficulty and cannot meet your deadlines, let the supplier know as soon as possible (suppliers have told us over and over again that they are more than willing to work with a customer who is experiencing a temporary cash squeeze—as long as the customer talks to them).

 

Final Thought

Share the credit when the idea works. When two departments work together, the results are usually more than twice what either could accomplish alone. Once the CPO realized that the AP manager was willing to share the credit for the success of their plan, he was happy to work with her. This will pay off in the future when she needs his help again.

 

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