How can procurement become more aligned with, and demonstrate its impact on, the main measures of business success? This question was posed recently in an article published by the highly respected Future Purchasing Group.
Their article “procurement business impact — charting your financial impact” explored the impact that procurement can make on a company’s sustainable shareholder value — the core measure of any company’s success. The article defined four key shareholder value drivers:
1. Accelerating free cash flow
2. Reducing costs
3. Reducing risk and the cost of capital
4. Increasing long-term business value
For businesses that have substantial vendor rebate earnings, better rebate accoutning can improve cash flow, reduce the cost of capital and therefore increase the long term business value.
Therefore, the impact that procurement teams can have on businesses impacted by vendor rebate management — like buying groups, building materials and wholesale distribution — is significant.
We aren’t referring simply to the standard measures like cost savings, but the impact that better vendor rebate deals can have on the bottom line.
Added to that, having a handle on rebates obviously reduces errors which in turn reduces the potential for disagreements with suppliers. From there it follows that procurement should be able to foster better relationships with key vendors which is always a good thing!
Having established the positive effects that better vendor rebate management can have on a business, and the need for continued and improved relationships with vendors, let’s explore how better alignment between finance teams and procurement can drive better vendor rebate deals.
Firstly, what do we mean by “alignment” and what causes some procurement and finance teams to be misaligned?
By alignment, we mean the certainty that deals negotiated by procurement are being correctly exercised by finance. In our experience, there are many companies out there where the deals are so complex that the existing financial control systems cannot cope with them and the benefits that have been negotiated are simply missed.
What are the reasons?
- Unclear financial measures — procurement teams tasked with striking the best vendor rebates are hampered by not having an understanding of the true impact that rebate payment terms and volumes can have on the business. A single view by both finance and procurement of all rebate deals and communication of bottom line impact will allow procurement to negotiate more effectively.
- Poor systems — Procurement teams still very often rely on spreadsheets or other isolated systems to negotiate vendor rebate deals. These processes and the details of rebate agreements are often not transparent to financial teams and therefore it is difficult to assess the positive (or negative) impact rebates are having on cash flow and the bottom line.
- Complexity of deals — multiple vendors and complex deals can be extremely difficult to manage without a good supporting system in place. Depending on the extent of rebate activity, the rebate accountant in some companies can have a significant impact on the company’s success. Rebate accountants need a good supporting system to be effective.
Correctly aligned, with the right systems and processes in place, finance and procurement departments that deal with complex vendor rebates can deliver better cash flow, reduced capital costs and long terms business value.
Listen to our 45-minute recorded webinar entitled 'Vendor Rebates — how to manage complex deals and drive margin'.
In the webinar, we discussed the issues that companies face when dealing with complex vendor rebates. You will hear real examples from companies in Building Materials, Wholesale Distribution and Buying Groups, and understand the positive effects that automated rebate management systems can have on your margin. Richard Piekar, a seasoned global procurement professional in the Building Materials sector joined the discussion and brought his own unique experience and insight into the discussion.
Click the link below to access the recording.