How Procurement Can Be Sabotaged By A/P

Are These Procurement Nightmares Happening In Your Organization?

PurchTips Edition #346    Click here for the printer-friendly version

Picture of Charles Dominick, SPSM, SPSM2, SPSM3, author of this procurement article on procurement accounts payable.By Charles Dominick, SPSM, SPSM2, SPSM3

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In procurement, you work hard to negotiate cost savings and build profitable supplier relationships. But, if improperly managed, your accounts payable (A/P) department can unintentionally sabotage much of the good work that you do. Here are three ways that A/P can sabotage procurement successes:

  1. By not paying suppliers on time. Other than maybe being rude to supplier executives, there is nothing that causes more strain on a supplier relationship than paying them late. Cash is the lifeblood of your suppliers’ business. By extending payment terms to your organization, your suppliers trust that you will pay them on time. When A/P fails to send payment to suppliers on time, suppliers may reconsider how closely they partner with you, require your organization to pay cash-on-delivery, or even refuse to do business with you any longer.
  2. By deducting early payment discounts when not paying early. Suppliers offer early payment discounts – like a 2% discount if an invoice is paid in 10 days rather than 45 – for the benefit of improved cash flow. If your A/P department still deducts the discount after they are eligible to do so, it is absolutely unethical. In fact, I’d consider it a veritable criminal offense, akin to stealing money from someone that’s supposed to be your business partner.
  3. By paying invoices that have higher prices than your contract or purchase order. Some A/P departments have a policy that allows them to pay invoice amounts that don’t match the purchase order or contract, but are within a threshold. I’ve seen thresholds as high as 5%. So, imagine negotiating a 5% cost savings but never having it hit the bottom line because A/P pays invoices that are 5% too high.

These problems can be prevented through good collaboration between procurement and A/P. Discuss these specific issues with the head of A/P and come up with a strategy to make sure that they don’t arise in your organization.

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