How Vendor Management Impacts Supply Chains
The future of the supply chain remains an uncertainty for many companies. Nearly one out of four companies (23%) are unsure of when their inventory will return to normal levels. The pandemic, war in Ukraine, labor shortages and disputes, and other issues have left companies struggling to stabilize their supply chains. This has caused challenges and delays across multiple stages of the AP workflow, including: invoice processing, payments, and reconciliation for 84% of the finance leaders.
Savvy AP teams realize that strong vendor relationships and on-time payments are critical to a healthy supply chain. In order to overcome current market challenges and strengthen their vendor management approach, many AP departments are automating their Accounts Payable invoice-to-pay processes and placing more focus on vendor management.
What is Vendor Management?
AP vendor management encompasses all aspects of vendor relationships: selecting vendors and negotiating contracts; responding to inquiries; and updating payment and contact information. It also involves making sure that vendors are paid on time and that shipments are received when expected.
An effective accounts payable vendor management program solidifies key relationships with sellers and reduces the risk of supply chain disruptions. By improving vendor relations, buyers can often get better contract terms and access to goods. In MineralTree’s 2022 State of AP report, 71% of finance leaders reported that vendor relationships have become more important over the past year, demonstrating the importance of a strong vendor management plan.
5 Key Supply Chain Challenges Impacting Vendor Management
Supply chains are being bombarded from all directions. Here are five major concerns currently impacting accounts payable vendor management:
1. Scarcity of Raw Materials
Access to critical goods – and the financial resources to purchase them in the quantities needed – are vital for companies to operate effectively. Unfortunately, today’s volatile supply chain has made it more difficult and expensive for companies to secure goods in a timely manner. According to KPMG, 71% of global companies say that the cost of raw material is their top supply chain threat for 2023.
2. The Impact of Inflation
In addition to causing companies to pay more, inflation reduces the cash flow that vendors need to produce goods. This makes it even more important for buyers to pay their vendors on time – and continue to stay in their good graces. As a result, inflation is one of the biggest challenges CFOs will face in 2023.
3. Labor and Equipment Shortages
All areas of the economy have been impacted by labor shortages, and the supply chain is no exception. In a panel discussion led by McKinsey & Company, logistics and supply chain executives cited labor and equipment shortages as key concerns that impact their companies financially and expose them to increased risk. These executives are focusing on increasing automation and transparency across the supply chain to help address these challenges.
4. Duplicate Payments
AP teams are still dealing with too many duplicate payments, which are typically caused by misplaced envelopes, lost mail, or miscommunication within the finance team. It is estimated that duplicate payments cost mid-sized companies $300,000 over a three-year period. AP teams and vendors alike don’t have time to waste on duplicate payments, and it can reduce vendor satisfaction.
5. The Threat of Recession
While it hasn’t happened yet, the lingering threat of recession is of concern to AP teams. Many are already running lean due to the pandemic-induced labor shortage and early retirements. In the 2022 State of AP survey, more than half of finance leaders expected challenges in hiring qualified finance and AP professionals in the next 12 months. The financial pressures of a recession would further exacerbate the staffing problem, making it harder for AP teams to get the budget to hire as needed.
Top 3 Vendor Management Practices
Vendor management is a two-part challenge: teams must establish a way to improve efficiencies, while also strengthening vendor relationships to gain better access to goods.
Implementing vendor management best practices is the best way to achieve these desired outcomes. Thankfully, teams don’t have to guess what these practices are. Vendors have clearly stated what they want from their buyers in the State of AP survey. Their three top needs include:
1. Getting paid on time
An overwhelming number of vendors – 84% – said that their number one concern is getting paid on time. This is crucial for their cash flow and ability to produce more goods.
2. Receiving payment in their preferred formats
There are several ways to pay vendors, and some are better than others. Many companies are turning to electronic payments to provide more attractive payment methods. For example, a virtual card offers the fastest payment and greatest security thanks to its randomized account numbers for one-time usage. AP teams are also commonly drawn to virtual cards for their payment rebates. By contrast, checks are the least secure payment method and take the longest time for payment to reach vendors due to its time-consuming processing and delivery.
3. Improved Visibility into the Payment Process
Since vendors depend on timely payments to fuel their cash flow, they need to stay on top of the status of customer payments. Nearly half (44%) of vendors said that AP teams didn’t respond to their payment inquiries in a satisfactory or prompt manner. This is often due to manual AP processing methods which make it difficult to find where an invoice or payment is in the workflow. Without this information readily available, AP teams can’t answer vendors’ inquiries in a timely manner.
It is nearly impossible to satisfy these vendors’ requirements using manual AP methods – let alone achieve the efficiencies that AP teams need – and that’s where automation comes in.
How AP Automation Helps Companies Manage Vendors
A growing number of finance leaders are turning to invoice-to-pay automation to overcome processing challenges, improve vendor management, and be better customers to their suppliers. In addition to helping teams address the above-mentioned vendor priorities, AP automation also provides many benefits for AP teams. Following are six ways automation simplifies the lives of AP teams and their vendors:
Faster processing & faster payments.
By eliminating the time-consuming manual data input, approval, and authorization practices, automation significantly streamlines workflows and speeds up payments to vendors.
Electronic payments are more secure.
In the 2023 AFP Payments Fraud and Control Report companies paying by check experienced the greatest amount of fraud (63% of organizations were impacted). Those using electronic payments fared much better. ACH payments contributed to 30% of fraud, while virtual cards accounted for a mere 9%.
ePayments simplify reconciliation.
Vendors’ AR teams need to reconcile their funds on a regular basis to verify that bank balances accurately align with the latest transactions. Since the invoice-to-pay system automatically includes remittance data details along with the payment, it makes their reconciliation faster and easier.
Payment formats are flexible.
By automating payments, companies can pay their vendors in a variety of ways, and use the method that each prefers – without having to add an entire new payment process for the AP team.
The ability to address vendor inquiries quickly.
Accounts Payable automation provides full visibility across the process, and allows AP to see the status of each invoice. This enables teams to easily find the information they need in order to respond to vendor inquiries quickly. In addition, many AP teams are turning to dedicated management payment services teams to handle all vendor inquiries, conduct supplier onboarding, and other aspects of vendor management in a timely and professional manner.
Analytics to help teams optimize operations.
By incorporating AP analytics along with automation, teams can identify and address bottlenecks in the payment process to improve operations, on-time payments, and response time to vendor inquiries.
In today’s volatile supply chain environment, the ability to be a better customer is critical to strengthening vendor relations and potentially increasing access to needed goods and materials. AP automation enables AP teams to address top vendor needs and improve vendor management, while also optimizing their own operations and securing their supply chains.
Taking it a step further, the IDC Supply Chain Survey 2022 found that companies with greater digital transformation had better financial results. By automating the invoice-to-pay processes, companies will benefit from more effective AP teams that can support overall business success, as well as stronger vendor relationships that will help them weather supply chain disruptions and other market conditions.