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A Resolution to Collaborate: Procurement and Treasury in 2013

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.

Leveraging experience for joint benefit

Financial Institutions such as J.P. Morgan that have experience in working with both Procurement and Treasury can help to bridge this gap and broker a closer alliance. We understand the drivers and constraints of each business function and work with both teams to construct solutions that deliver benefits at both a company-wide and functional level. Equally, we continue to see that implementing regional or global commercial card programmes, such as purchasing or travel and entertainment (T&E) are amongst the easiest and most successful combined projects on which Procurement and Treasury can co-operate. Both business functions derive significant value and objectives can typically be closely aligned, such as consolidating both purchasing spend and rebates. We are seeing a growing number of Procurement and Treasury departments across a wide range of industries working together taking advantage of regional or global commercial card programmes. The aerospace and defence industries are leading the way in many cases, due to their global supplier base and business operations in multiple markets and currencies; however, the benefits are comparable for any multinational business.Another ‘win win’ both for Procurement and Treasury, but also suppliers, is supply chain finance. Many industries are again taking advantage of these programmes, particularly where supply chain resilience is important due to the specialist activities of suppliers, such as pharmaceutical. As with commercial card programmes, supply chain finance has global applicability. The expansion of programmes into China and India as corporates focus on these regions continues, and the regulatory environment gradually becomes more favourable. In the UK too, we are seeing a number of companies consolidating in-country or regional commercial card and supply chain finance programmes with a single partner. Supply chain finance programmes are most successful when clear objectives are determined that both areas can support. These could include the number of suppliers onboarded and/or the value or range of finance that suppliers draw upon. Setting up a programme needs to be done sensitively. In many cases, Procurement will have developed relationships with key suppliers over many years, and do not wish to see this affected.

The SEPA catalyst

So how can treasurers and procurement managers make these connections? One immediate opportunity for collaboration is SEPA. With the migration deadline only 12 months away, companies operating in Europe have no choice other than to make their SEPA projects a priority. While many aspects of SEPA migration involve Treasury and Accounts Payable, there are also elements that involve Procurement. For example, SEPA migration is an opportunity to engage with suppliers to obtain or confirm payment instructions, but potentially also payment terms. Where direct debit mandates need to be transferred, Procurement may also have an important role to play, and there may be the opportunity to set up new instruments such as cross-border or B2B direct debits that have not been possible in the past. SEPA is also a catalyst for harmonisation and rationalisation of banking partners, accounts and cash management structures. Procurement can support Treasury in these initiatives by sharing its experience of managing complex selection processes.

A resolution beyond New Year

Encouraging closer co-operation between Procurement and Treasury, and designing global solutions that meet mutual objectives will continue to be an objective for J.P. Morgan. We anticipate that the trend for closer integration will continue, particularly as the strategic profile of both business functions increases. The global supply model continues to increase in complexity. By working together, these two key business areas can align the physical and financial supply chain more closely, improve control over working capital and increase competitiveness.James Waud