Linking Supplier Payment Terms to Performance Levels

/Linking Supplier Payment Terms to Performance Levels
Linking Supplier Payment Terms to Performance Levels2017-10-05T08:11:52+00:00

Linking Supplier Payment Terms to Performance Levels - Payment for Performance - Part 1

Linking Supplier Payment Terms to Performance Levels – Payment for Performance (PfP)

Invoice payment times differ widely within the Oil & Gas Industry and while there are many B2B / e-commerce / P2P initiatives underway in companies trying to address this problem of invoice payment delay it does boil back in many cases to the quality of Job or Services provided, and ultimately the Customers satisfaction levels with that job or service against performance goals in determining when the invoice gets paid. For the purpose of this article I am terming this PfP “Payment for Performance”. I mean the link between invoice payment terms and performance levels attained by the supplier.

Whether you are an Operator, Service company, or even a Mom & Pop operation the one thing we all can agree on is that even with Supplier Charters there is no standard differentiation framework for payment terms no matter how good the job or service provided was, no matter how much value it added to the customer.

Lets say that the Customer’s Supplier Charter says that they strived to pay all invoices in 45 days, and lets assume that they are delivering on this obligation.  It seems that across their suppliers ABC Inc type companies who provided a mediocre service later than needed get paid on 45 days which is the same as XYZ Ltd type suppliers who exceeded expectations by meeting all the project goals earlier than planned, below budget and yet despite performing better are also paid on 45 days. In that scenario the 45 day average for the charter would have been met across all suppliers even though supplier XYZ went above and beyond what was expected in terms of performance delivery. That does not seem right to me and needs fixed.

I might be way wrong here, but would it not be better to have bands of payment terms that correlate to levels of performance. If I for example as a supplier consistently perform really well for my customer then my company should be on the top bands for payment (payment in 15 days). Likewise someone who is consistently performing badly cannot expect to be paid to their 30 day terms on invoice and may be on a lower band of payment (payment in 60 days).  So under a PfP initiative the poorly performing supplier would get paid in 60 days and the good performer in 30 days. Assuming the same level of client revenue for both then the average would be 45 days and in line with the Supplier Charters average. Would that not make better sense and encourage the poorly performing supplier to up their game on performance levels ?

Most companies with Supplier Performance Management Initiatives are focused on using these to determine whether they will work with the supplier again, ie repeat business. Few are thinking outside the box at ways of fixing some of the frustrations in the relationship. It is in economically challenging times like these with low Oil prices, tighter margins and extremely tight cashflows that invoice payment, payment on time, payment term amendments, and other cash related discussions take place.

If we tied payment term bands to performance levels (such as the example highlighted in the above image ) then we would not need such frustrating discussions in relation to overdue payment on an ongoing basis. It would be clear to Suppliers that if they increase their performance levels they will move up a band, and as the image above highlights that supplier will benefit from increased cashflow as a result.

In part 2 of this series I will be looking at how to achieve this from a business process / system perspective as well as looking at some of the key components and also challenges that need to be overcome for a successful PfP (Payment for Performance ) initiative which include but not limited to:

  • How do we compute the suppliers weighted score?
  • Performance levels for a supplier will differ regionally, how will this impact the correlation between different payment terms for the same supplier across the geographical regions?
  • Performance levels for a supplier will differ across Category Lines / Business Lines, how will this impact the correlation between different payment terms for the same supplier across the Business / Category / Service Lines provided?
  • How do we deal with already committed payment terms?
  • How do we deal with already defined financially based performance based incentives / penalties?
  • Early payment discount terms often exist on Invoices. How do we manage the linkage between this and a performance based invoice payment terms?
  • Manually updating the latest band for each supplier could be an administrative nightmare, how do we automate the linkage between supplier performance management scores and P2P payment terms?

………

NOTE: Do feel free to send me any additional challenges you think need addressed.

I will also look at some examples of how you can get around these challenges, and finish off with the business case to sell this internally in your organization and the case to get supplier buyin to your PfP Initiative.

Thanks / Feedback / Experiences Welcome

If interested or have questions around PfP feel free to like, or share this post or better still leave a comment / question and I do my best to answer it promptly. I will also send you personal message with the link to Part 2 whenever its been published in the coming weeks ahead.

The whole concept of a PfP initiative needs carefully planned, and communicated and as such I welcome any feedback on this post especially from those that have looked into linking payment terms to supplier performance in any respect, irrespective of whether you have achieved this or not at a systems level.

Also keep any eye out for the other adhoc articles I post on SRM, SPM, e-Procurement, and Supply Chain Data Management. See List below.

Kind regards

Daryl


 

Article Statistics since published: Share this article by email or Social media:
Likes:
87
Comments:
12
Shares:
26

 

View a list of all our SRM / SPM / P2P Best Practice Articles on the OutPerform Best Practices Blog

 


About : Daryl Fullerton 

Daryl is a Supplier Performance and Relationship Management Specialist at Outperform SRM. He provides guidance and consultancy on the design, development and Implementation of various Supplier Performance & Relationship Management Systems for Global Oil & Gas Operators and Service Companies across Upstream, Midstream and Downstream Sectors.

Specialism’s include Supplier Performance & Relationship Management, Supplier Risk Management, Supplier Enablement, Operational Risk Management, Contract Compliance Management, Scorecards, KPI’s, P2P Process Automation, PIDX Standards, and Management Information & Reporting Systems.

A keen promoter and believer of the importance and focus on his ‘partnering to solve approach‘ in improving Operator / Supplier Relations in 2015 Daryl was awarded the honor of “Supply Chain Pros to Know” in recognition of the leading supply chain professionals and experts worldwide.

Connect with / follow Daryl on Linkedin

 


About : OutPerform SRM
OutPerform SRM is a management consulting firm that helps leading Oil & Gas businesses establish value added solutions for effective Supplier Relationship Management (SRM). We help our clients reduce inefficiencies, reduce costs, and make lasting improvements within their Supplier Relationship Management (SRM), Supplier Performance Management (SPM), and many more important business critical Supply Chain Initiatives . Through our hands on experience with Major Oil and Gas Operators over the last 17 years we’ve now built a firm uniquely equipped to this task across all Major Category Lines.

Our Experts have Experience of working with a wide range of internal and external stakeholders with the ability to build relationship and influence outcomes. Our Experience of supplier performance management includes detailed knowledge of processes and frameworks including commercial performance management of contracts and knowledge of supplier risk management techniques.

You can also follow OutPerform SRM on Linkedin

 


For a Free 20 minute (no obligation) discussion call click here to email us and we will contact you to arrange a suitable date and time for a brief tele call to discuss best practices in SPM & SRM.

Alternatively simply complete the below details and area of interest and we will send the relevant information to you by email :