The importance of payment for SRM

posted by Paul Christensen
25 March 2019

Building strong, trusting relationships with your suppliers can be a powerful competitive advantage. Fundamental to this is understanding suppliers’ business priorities and paying them as fast as possible to ensure financial certainty.

Supply chains have never been more finely poised. With the advent of ‘just in time’ stock control, drop-shipping and digital inventory management, leading businesses are running operations with very little stock gathering dust.

The advantages of this approach are significant. Reducing the amount of cash tied up in stock, cutting down on the need for warehouse space and making the supply chain more responsive to demand all serve to improve margins significantly.

However, this finely balanced approach, which relies on stock being delivered exactly where and when it is needed, opens up the risk of supply chain disruption. Even relatively small disruptions in one part of the manufacturing process can create very expensive domino effects.

For example, many car manufacturers operate just-in-time manufacturing. If one of their thousands of suppliers experience financial difficulty and is forced to delay the delivery of one of 30,000 parts required, this would have a knock on impact, leading to complications and delays to the next stages of development.

A key part of managing and mitigating against these risks is working strategically with suppliers to ensure that the supply chain collectively anticipates potential problems, before they materialise as issues which will impact the supply chain.

As a function of the procurement team, supplier relationship management (SRM) is still in its infancy. According to a recent report from PwC, only 13% of businesses have an established SRM function. However, that will likely change very soon, with 64% exploring or implementing some form of SRM.

For many firms, these SRM functions take the form of technology systems for managing supplier relationships. However, seeing this as primarily a problem to be solved by technology misses the point. The key to supplier relationships is in the name: it is about relationships.

The aim should be to move beyond a purely transactional relationship to a more supportive and collaborative one. This means working to suss out each others’ business priorities and understanding how to best support each other to grow and find success.

It comes down to trust. An example of this trust is that the supplier will provide the buyer with what they need within the agreed timeframe and in return, trust that the buyer will pay the supplier within the payment terms agreed.

Once this trust is established, the relationship can then move beyond the coordination of delivery goods and services, creating joint R&D opportunities, providing financial certainty and enabling both parties to invest in new processes, reducing the cost of production to everyone’s benefit.

Crucial to this is keeping payment terms as short as possible and paying suppliers on time. When it comes to smaller and specialist suppliers in particular, slow payments can be especially damaging, killing 50,000 small businesses every year. Suppliers which are constantly chasing for payments, or struggling with their cashflow while waiting for long payment terms are far less likely to feel like they are ‘in this together’ with their buyers.

Given that long payment terms are such a widespread practice among large buyers, becoming known as a fast payer can quickly earn a buyer a reputation as a leader in their field. This will help when it comes to securing new contracts or, particularly in the case of more specialist suppliers, securing exclusivity with the best suppliers. Furthermore, we have had a number of conversations with various suppliers and most agree that they invest more effort in delivering the best job to buyers that pay on time most consistently.

This is only the first step. SRM is a complex and multilayered process which requires sustained effort over the long term to really demonstrate a rock solid commitment to your suppliers. However, speeding up payments can provide a jumping off point which can make an immediate and meaningful impact for the majority of your suppliers, particularly your SME suppliers.

☛ Paul Christensen is CEO and co-founder of Previse.

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