What is a network strategy ?
The core strategic question is what are the objectives and priorities of your network strategy.
There is quite a range of objectives one could pursue with regard to your suppliers:
- digitalise your relationship
- exchange critical transactional data/information in real-time
- automate your transactions
- improve your cashflow and your suppliers cashflow (DPO)
- make your P2P process more efficient
- create a unique entry point for all your invoices (or other transactional documentation)
- reduce your cost recovery program
- reduce your invoice exceptions
- ensure legal and regulatory compliance of the documentation linked to your P2P or supply chain
- apply discounts and payment terms consistently
- apply the principle of source of truth by transferring relevant responsibilities for data accuracy to suppliers (maintaining their coordinates, their banking information etc…)
- facilitate the clearance/reconciliation of complex invoices at the item level
All of these objectives are complementary and not exclusive of one and other.
It is also important to consider that while you pursue your own objectives and benefits, these might conflict with or even put a high burden on your suppliers’ organisation, which the suppliers might find justify a recoup through pricing at a later stage. This is often a fear expressed by buyers.
Therefore, you need to look at your population of suppliers to identify those who like you, would benefit from being on the network with you, those who would not be negatively affected and those for whom, it would be a significant burden. So, a segmentation of your suppliers along these lines is a pre-requisite as it will shape how you approach them, how you will engage with them and the topics which you will address together.
You also need to get a good idea of the size of the benefit/value to you being on the network with a particular segment of suppliers vs. the size of the benefit/value or cost/inconvenience to the suppliers.
You then, need to think of your BATNA (Best Alternative To A Negotiated Agreement). The BATNA will determine whether you need to consider the following remedies:
- renounce to join the supplier on the network
- fund/compensate partly or totally the supplier for joining the network*
- change supplier so as to 1)stick to your objectives 2)enjoy the benefits/value that you derive from being on the network with the supplier for the category.
- review the type of interaction you envisage with the supplier over the network e.g. only invoicing but no Advanced Shipment Notices (ASN) and no PO acknowledgment.
*If you decide to compensate the supplier, it should be for the following reasons:
- you have made the strategic decision to join the network with all suppliers of certain categories, a determined spend, number of transactions etc… It is about strategy and policy.
- you cannot change supplier e.g. single source, monopoly, a pricing advantage which offsets the savings, efficiency gains you would derive from being on the network with the supplier
- the supplier has no opportunity to be on the network with other customers (other than with your company) and therefore all the network related costs would impact negatively and directly the profitability of the contract held with your company, paling in comparison with potential benefits for the supplier.
- if the supplier has a future opportunity to transact with other customers over the network, any compensation or subsidy should be temporary and conditioned to the supplier trying to maximise the number of her customers, on the network with her and reporting back.
It is good practice, to understand suppliers’ “push back” arguments when you engage with them with regard to joining the network and what are justified counter-arguments which might provide transparency:
- Technical complexity: which support is available
- Set-up costs to join and potentially for network integration : to be potentially spread over other supplier’s customers to join on the network*
- Subscription costs: to be spread over customer pool and balanced with benefits/value accrued to the supplier*
- Transaction costs: savings/transaction and payment processing cycle improving supplier cashflow
- Dedicated resources to manage the network account: spread over customer pool and balanced with benefits/value accrued to the supplier*
It is also a key to your strategy to make the following considerations:
- which digital relationship is joining the network replacing? If it is EDI, look at the maintenance, cost and complexity of the EDI link and whether replacing it with the network, is of any benefit.
- which other AP solutions are in place and whether, the transactions processed through an intelligent network would: 1)replace the existing solutions entirely 2)partially replace these and to what extent 3) reduce or increase the value received from the existing solutions and to what extent? (In this situation, it is generally the case that a network invoicing/transactional solution reduces the workload and accelerates the processing time of the most frequent low-medium value invoices, allowing AP staff and the existing solutions to focus on more complex, high value invoice reconciliations for which the network also provides more data/information).
- In the above context, it is also key to see which integration you require between your existing AP solutions and the network.
- whether you expect suppliers to invoice all their invoice volume through the network or whether you expect them to invoice in such manner only the invoices which clearance/approval can be fully automated.
- Last but not least, it is also important to form a recommendation vis a vis the individual suppliers, as this will define the type of account the supplier will hold, the integration on her side, the impact their costs, efforts and timeline:
- is the supplier only expected to receive POs through the network?
- is the supplier to invoice through the network?
- is the supplier expected to exchange documents across the supply chain (ASN, B/L, Certificates etc…) in which case, an ERP integration with the network might be warranted?
- is the supplier supposed to invoice all their receivables through the network ?
- is the supplier a long-term supplier, how much time is left on the contract, is there going to be a competitive tender soon or not ?
The network strategy should be an opportunity not only to make your P2P and Supply chain more efficient and compliant, but also to reinforce the mutual commitment to be in a business relationship.
It is highly recommended that buyers are involved in the design and execution of the network strategy, as they 1)own the relationship with the supplier 2)need to integrate the network strategy in their sourcing strategy 3)are in a better position to assess the above mentioned BATNA.