Financial Supply Chain

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A Resolution to Collaborate: Procurement and Treasury in 2013 We consider the opportunities for proactive engagement between Treasury and Procurement - and explain some of the benefits that can be gained by this engagement.

A Resolution to Collaborate: Procurement and Treasury in 2013

by James Waud, Executive Director and Head of Corporate Sales, Northern Europe, J.P. Morgan Treasury Services EMEA

This is the time when many of us make New Year resolutions. Losing weight, improving our health and wellbeing are probably the most common, and are often broken by the end of the month. But what professional resolutions should we really be making, and how can we keep to them? One way of sticking to a resolution is to focus on positive things that you should be doing, rather than what you shouldn’t. My personal suggestion for this year is that Treasury and Procurement should identify at least one opportunity to work together more closely on. This is not a new message, and at J.P. Morgan, encouraging this collaboration has been a priority for some time. New Year’s resolutions are rarely new, however, the New Year brings renewed focus and impetus. This article considers some of the opportunities for proactive engagement between Treasury and Procurement, and the benefits that a number of our customers are achieving by doing so.

Opportunities for collaboration

Understanding closer engagement between Treasury and Procurement has been a key concept at J.P. Morgan and we continue to witness an evolution in this relationship. Many Procurement projects have a Treasury implication, and vice versa. For example, we know that Procurement is responsible for contracting with suppliers, including payment conditions, and has a major role in supply chain integration. Purchase order issuance, receipt of goods and invoices are all key milestones in the financial supply chain as they directly affect working capital metrics, in particular days payable outstanding (DPO). In addition, when first contracting with a supplier, issues such as payment timing, payment methods and the remittance information that is included on a payment are agreed, which again have a significant impact on cash management, reconciliation and account posting.

Supply chain finance is an important initiative on which Procurement and Treasury can co-operate for mutual benefit. Procurement has the ability to negotiate more favourable financial terms with suppliers, without compromising supply chain resilience, while Treasury derives working capital benefits and better cash flow forecasting capability. The use of purchasing cards also brings advantages to both business functions. Procurement can ensure that purchasing processes take place in accordance with company policy, whilst improving convenience and reducing administration. At the same time, the number of supplier payments is reduced, cutting transaction costs, and Treasury gains better visibility and control over payments made using cards.

Consequently, from a Treasury perspective, there is a strong incentive to work closely with Procurement to understand and influence future payment flows. Procurement can also benefit from a closer relationship with Treasury, leveraging treasurers’ experience of working with relationship banks and implementing large-scale financial programmes. When Procurement works on projects such as purchasing cards or supply chain finance without Treasury’s involvement, these initiatives often deliver fewer advantages to the company as a whole than a collaborative approach can achieve; banking relationships may become fragmented, and working capital objectives compromised. Similarly, Procurement has a great deal to add to Treasury projects such as bank selection by adding structure to the engagement process, particularly where Treasury resource and third party advisors may be constrained in the current environment.

Managing differences

However, there are potentially friction points. These can result from having different objectives and metrics for measuring success. For example, payment incentives offered by suppliers, such as early payment discounts, may reduce the cost of goods and services and therefore meet Procurement’s objectives. On the other hand, reducing DPO may be detrimental to working capital and liquidity management, and therefore compromise Treasury’s goal to maintain adequate levels of liquidity and avoid short term borrowing to cover working capital shortages. The two business functions should therefore ideally work towards objectives that are aligned at a corporate level as opposed to solely at a functional level. This is easier in situations where Procurement and Treasury have the same reporting line, such as to the CFO. Where they have separate reporting lines, such as to the COO and CFO respectively, it requires more effort and co-operation at a senior management level to align performance goals and metrics.

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