Cost savings or cash generation? Procurement teams have been asked this question time and time again, with cost savings traditionally coming out on top. However, over the past few years we have seen a subtle shift with procurement chiefs no longer answering in the traditional way. Company-wide working capital objectives and financial pressures on suppliers has pushed procurement to focus on cash generation for all parties along the supply chain.
The challenge comes when procurement teams, who are working on cash generation and working capital optimisation programmes, need to understand the following: how much trapped cash can I unlock from my supply chain? How much cash should I deploy into my supply chain? And how will these actions impact my suppliers?
While the answers to these questions are fundamental to realising the benefits of effective supply chain finance, in reality, few companies have this information available, especially in an on-demand capacity. Consequently, much of the global working capital opportunity remains untapped, with as much as $14tn currently trapped in supply chains around the world.
We have seen many companies use different tools and strategies, from extending payment terms to securing financing for receivables. But when put into practice, many such initiatives fall short of their targets. Often this is due to poor visibility over the cash deployed across the enterprise.
AI is beginning to change the game here, however. This gives procurement teams a far more detailed understanding of the potential benefits of their chosen working capital strategy, and how to ultimately achieve their company’s goals.
In practice, procurement functions will be able to create a comprehensive supplier segmentation strategy, which identifies the organisations that are more likely to participate in early payment programmes. Procurement teams will also have the ability to predict which invoices suppliers will choose to accelerate under a range of different conditions.
Leveraging the power of AI and extending into the cash forecasting process will revolutionise the space.
Procurement, alongside treasury and finance, will be able to forecast accurately how to fund early payments, either from internal or external funding sources.
Developments in AI and machine learning are already reshaping working capital, and further benefits will follow. In the next couple of years, cheaper predictive capabilities will increasingly enable procurement to fully realise the working capital opportunities and forecast which suppliers will choose to finance their invoices. At the same time, companies will be better positioned to understand the likely effect of different adjustments to their working capital strategies, while benefiting from greater visibility over their future cash flows.
In other words, technology will increasingly support procurement by providing detailed and timely answers to the questions that inform their approach to supply chain finance: “How much trapped cash can I unlock from my supply chain? How much cash should I deploy into my supply chain? And how will these actions impact my suppliers?”
Juhie Kapoor is director of content and communications for Taulia and has previous experience as a journalist as well as ten years’ experience in marketing and bid management for leading transaction banks.
Procurement Leaders received no payment directly connected with the publishing of this content.