Six Steps to Optimize Payment Terms - Part Two

Welcome to the second and final installment of our content series on the ‘Six Steps to Optimize Payment Terms’ by Robert Kramer, Chief Product Officer at Calculum and a thought leader within the SCF Industry. This two-part series aims to delve into the critical aspect of payment term optimization and the six steps required to achieve it. 

In this article, we delve into steps 3 to 6 of the comprehensive framework, namely Program Design, Procurement Review & Education (PRE), Supplier Negotiations and finally conclude with the final step of Management. 

‍Step 3 - Program Design

Following Steps 1 and 2 from our last article, the next step is to take the strategic direction that was approved by senior management and add the ‘step by step’ navigation required to support the Procurement team’s efforts.  This includes documenting best practices, developing processes and guidelines, creating program phases, identifying required tools and establishing individual objectives.

The first thing is to determine what suppliers you want to include in Phase 1.  Some companies want to target “easier” suppliers first, that is, suppliers with a high probability of successful negotiations.  Others want to target larger suppliers. 

Still others like to take suppliers associated with a small group of procurement managers in order to focus on their success which can then be shared with the rest of the Procurement team.  Which method you choose depends on factors specific to your company , including your goals.  

After identifying the Phase 1 suppliers and associated goals, you can move on to place suppliers in future phases.  Whilst it is important to establish future phases, timelines and metrics to determine how success will be measured, you shouldn’t worry too much about these future phases.  You will learn a lot during Phase 1 that will impact future plans.

The next step in Program Design is a critical one – determining the Program Design Parameters.  These are the detailed instructions that will support the Procurement team’s supplier negotiation success.  These parameters include items such as:

1. Supplier messaging, including objection handling - How will better cash flow for your company  benefit suppliers? Understandably, suppliers instinctively see longer payment terms as a negative, but Procurement must help them see the benefits for them and be prepared to handle objections. 
2. Supplier communication strategy(s) - e.g. in-person meetings, letter/email, etc.
3. Supplier meeting preparation, agenda and attendees.
4. Negotiation parameters - e.g. which suppliers, if any, will we accept less than our target?
5. Required documentation after negotiations are concluded.
6. Negotiation time frames.
7. Escalation path, - if any, to change targets.

Finally, you must identify tools to support the Procurement team’s efforts.  In working with many Procurement teams I’ve noticed that they are much less comfortable negotiating payment terms than they are negotiating pricing.  This is because they have a lot more data, tools and experience negotiating pricing than payment terms.  Therefore you need to arm them with tools that can provide supplier specific or commodity specific data on payment term benchmarks,  tools to help them understand the quantitative impact of payment terms on cash flow, capital efficiency and profitability, etc.

Program Design is the most critical stage of our pre-negotiation processes because it provides the detailed roadmap for the Procurement team to reach their goals.  Even with the best business plan and strategy, without good program design, Procurement will struggle to negotiate optimized payment terms.

Step 4 - Procurement Review & Education

The initial Procurement Review & Education (PRE) sessions are held solely with the Procurement team managing Phase 1 suppliers in order to maximize the impact.  This allows the focus to be on a smaller number of suppliers with the Procurement team who will have supplier discussions within a few weeks.  

If you hold the PRE sessions with the Procurement  team too early, a lot of the impact will be lost by the time they conduct supplier negotiations and you lose the ability to incorporate the lessons from the Phase 1 supplier discussions into future phases.  Later phases will generally include larger numbers of suppliers and Procurement staff.

There are four primary objectives for the PRE sessions:

1. Review the Program Design parameters - Among other things, this provides the details of how and what to communicate to suppliers.
2. Review tools and best practices to support supplier negotiations - E.g. utilizing a tool like Calculum, cash flow & working capital fundamentals, objection handling, etc.
3. Review Phase 1 suppliers and incorporate feedback as necessary - The Procurement team will always have specific knowledge of suppliers and supplier relationships that even the best of tools are not aware of.  It is important to include this knowledge in your Phase 1 supplier review.  Procurement may not know what information is important for the term optimization program, so you should incorporate a Supplier Relationship Assessment diagnostic to help draw the information out.
4. Establish individual Procurement manager objectives and management processes

The sessions must begin with a message from the senior management sponsor of the program, e.g. the CPO or CFO.  That message should communicate the importance of the program and why the company is doing it.   As previously stated, supplier payment term optimization is a large-scale, strategic initiative and should be communicated as such.

Without proper Procurement Review & Education it is difficult to get the Procurement team’s buy-in and establish accountability.  In addition, you will fail to arm the team with the tools and best practices they need to be successful.

Step 5 - Supplier Negotiations

During this stage you will communicate with suppliers regarding the term extension initiative as documented in the Program Design Parameters.   

Multiple communication methods will be used, including letters, emails, virtual and face to face meetings.  

For Phase 1 suppliers, it is important to have internal prep sessions between the Program manager and the Procurement team to review strategies and tools specific to each supplier’s commercial and financial situation.

The key here is to over-support the Phase 1 supplier negotiations to ensure positive momentum with both the Procurement team and suppliers.  

Step 6 - Management

During the final step entitled Management , you will monitor program status vs targets at each level of accountability (e.g. Procurement manager, region, etc.).  Although it is the ultimate objective, cash flow gain or term extensions as a goal are a lagging indicator so you will want to monitor the engagement process as well, e.g. the amount of supplier spend contacted.  

Also, keep a close eye on close rates, that is, the percentage of suppliers (by spend) with successful negotiations vs spend with completed negotiations.  

While monitoring progress and maintaining accountability are important, the most critical goal, especially during Phase 1, is to identify the most successful Procurement managers, determine what is driving their success and then replicate these best practices to the rest of the Procurement team.  

Conclusion

The returns from properly optimized payment terms are strategic, resulting in millions or billions of dollars in cash flow gain for individual companies.  However, the corporate world is littered with companies whose term optimization results did not come close to matching their potential because many companies do not implement such programs properly.  For example, in the food and beverage industry, the best performing firm achieved payment term increases 6 times the worst firm, in household products the gap was 8 times, in chemicals 13 times.

Properly optimized payment terms offer significant cash flow gains for companies, yet many fail to realize their full potential due to improper implementation. Discrepancies in performance across industries highlight the importance of strategic management of payment term optimization programs. Organizational commitment, strategy development based on analytics, and providing procurement teams with necessary tools and training are essential for successful optimization efforts.

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About the Author

Robert is currently the Chief Product Officer of Calculum and the Managing Partner at Capgenta, a consulting firm specializing in payables optimization and Supply Chain Finance.

Previously, Bob co-founded Supply Chain Finance provider PrimeRevenue and Intelisys, an e-Procurement technology company.  

A recognized expert and thought leader in payables optimization and Supply Chain Finance, he was recognized by Supply & Demand Chain Executive Magazine as a “Pro To Know” and has been quoted in multiple publications including The Financial Times, CFO Magazine, Supply Chain Brain and Global Trade Review.

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