#ProcurementBestPractices

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Procurement Payment Terms: An Overview and a Complete Guide

Originally Published on: SpendEdge |Procurement payment terms: An overview and a complete guide 

As a manager or director of procurement, sourcing, purchasing, or the supply chain department at a business, you know how important it is to maintain a good relationship with your suppliers. One of the key factors in this relationship is the payment terms. Suppliers generally want to be paid as soon as possible, while the business wants to hold onto its money for as long as possible. Negotiating payment terms can help ensure a successful working relationship. When a supplier receives a purchase order, certain terms and conditions apply to all invoices received. The payment terms are used to calculate the date on which an invoice is received, and if any information is missing on a business invoice, the payment term is calculated once.

Strategic Goal-Setting with Suppliers: A Powerful Tool in Effective Procurement Practices

Strategic goal-setting with suppliers is a powerful tool in effective procurement practices. It goes beyond just trying to strike favorable deals and instead focuses on building collaborations that can take your procurement process to new heights. Clear and consistent payment terms can benefit both the supplier and buyer in the short and long term. For sample orders, it’s common to pay the total amount upfront as it has a lower value and helps the supplier start production and delivery quickly.

Diverse Payment Terms: An Array of Options

Payment in Advance:

Payment in advance is a payment method where the buyer is required to pay for goods or services before they are shipped or delivered. In this arrangement, the seller receives payment upfront, providing the highest level of security. However, buyers should carefully consider the risks and implications before agreeing to this payment method.

Letter of Credit (LC):

A letter of credit (LC) is a financial document issued by a bank or financial institution on behalf of a buyer to guarantee payment to a seller for goods or services provided. It serves as a form of payment assurance and risk mitigation in international trade transactions.

Documentary Collection:

Documentary collection, also known as “documentary trade collection” or “cash against documents,” is a payment method used in international trade and procurement. It involves the exchange of documents related to the shipment of goods and payment between the buyer and the seller’s banks.

Open Accounts:

Open account is a payment term in international trade where the buyer receives goods or services from the seller before making payment. The seller ships the goods or provides the services without requiring payment upfront, and the buyer is expected to make payment within an agreed-upon period.

Payment Schedule Harmony:

The concept emphasizes the significance of a payment schedule in business transactions, symbolizing the broader dynamics of business relationships. It embodies the principles of trust, reliability, and collaboration, fostering an environment where parties can work together toward mutual prosperity and sustained success.

How to Improve Payment Negotiation?

Improving negotiation about payment requires a combination of strategy, communication skills, and understanding of both your own needs and those of the other party.

Know Your Financial Situation:

Understand your own financial position, including cash flow needs, budget constraints, and any financing options available to you.

Research Market Standards:

Research industry standards and typical payment terms for similar goods or services. This information will provide you with context and leverage during negotiations.

Identify Your Priorities:

Clarify your priorities and preferences regarding payment terms, such as the desired payment schedule, discounts for early payment, or flexibility in payment methods.

Understand the Supplier’s Needs:

Consider the supplier’s financial needs and constraints. Understanding their perspective can help you tailor your negotiation strategy to find mutually beneficial payment terms.

Build Rapport and Trust:

Establishing a good relationship with the supplier based on trust and mutual respect can make negotiations smoother. Communicate openly and transparently to build trust.

Offer Incentives:

Propose incentives for the supplier to agree to your preferred payment terms, such as offering a larger volume of business, providing referrals, or committing to a long-term partnership.

Seek Win-Win Solutions:

Focus on finding solutions that benefit both parties. Look for creative compromises that address both your needs and the supplier’s needs.

Be Prepared to Compromise:

Be flexible and willing to compromise during negotiations. Consider alternative payment structures or terms that may be acceptable to both parties.

Document Agreements:

Once you reach an agreement on payment terms, make sure to document the terms clearly in a written contract or agreement.

Follow Up and Maintain Communication:

After reaching an agreement, maintain open communication with the supplier and follow up on payment terms as necessary.

How SpendEdge Can Help with Procurement Payment Terms with Best Practices?

SpendEdge offers peer best practices benchmarking solutions, comparing a company’s procurement strategies and performance with industry peers. By analyzing key metrics and identifying best practices, clients gain actionable insights to optimize procurement processes, enhance supplier relationships, and drive cost savings. With data-driven recommendations and continuous monitoring, companies can adapt and improve their procurement operations, staying competitive in the market.

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Elevating Procurement Strategies in the Mining Sector: A Strategic Perspective

Originally Published on: SpendEdge |Best Procurement Practices in the Mining Industry | SpendEdge

In the midst of urbanization, market evolution, and rapid digitization, supply chains across diverse industries are undergoing significant transformations. The growing importance of sourcing and procurement, particularly as companies expand, necessitates the adoption of effective procurement best practices. Chief Procurement Officers (CPOs) are increasingly recognizing the significance of efficient procurement strategies in ensuring high-quality performance and overall success. Within the mining industry, recent challenges, such as the initial impact of the COVID-19 pandemic and the subsequent surge in demand, emphasize the pivotal role of procurement in adapting to dynamic market conditions.

Challenges in the Mining Industry: The mining sector underwent a substantial downturn during the early stages of the COVID-19 pandemic, leading to reduced demand for basic commodities and ensuing profitability challenges. However, with economies in recovery, there is now a sudden increase in demand, requiring preparedness to meet consumer expectations. Another crucial factor influencing the industry is the rise of environmentally conscious practices, resulting in increased demand for metals and a push for reduced emissions and environmental responsibility.

Key Procurement Best Practices:

Effective Contract Management:

Establishing mutually beneficial contracts is crucial for meeting demand and maintaining robust business relationships. Drafting contracts should consider potential risks, ensure timely decision-making, and comply with legal, environmental, ethical, and safety requirements. Utilizing data-driven and standardized systems contributes to effective business operations and sustainable success. Clear KPIs (Key Performance Indicators):

Tracking the performance of departments and employees through KPIs is essential for making informed decisions and addressing shortcomings. KPIs aid in monitoring supplier performance, making necessary adjustments, and tracking internal progress in areas such as quality, lead time, efficiency, costs, and savings. Establishing precise and clear KPIs contributes to the development of a streamlined organizational structure. Category Management:

Implementing category management enhances efficiency, sustainability, and organization within procurement operations. Defining clear categories and assigning category managers provide data-driven insights for improved business performance. Category management allows for a focused approach to supplier performance, identifying areas for improvement, necessary equipment or training, and potential partnerships. Focus on Supplier Relationships:

Continuously improving performance, business relationships, and strategies is crucial for sustainable success. Strengthening supplier relationships involves implementing contract and performance-based procurement practices. Revisiting partnership terms, maintaining strong communication, and providing a platform for partners to contribute are essential for robust partnerships. Improve Contract Flexibility:

Collaborative contract development allows for flexibility, ensuring that both companies and suppliers can meet demands without excessive costs. Incentivizing timelines, setting remediation costs, and encouraging the mitigation of contingency costs contribute to a successful and flexible contract. Clarity, transparency, and a strong legal framework are essential for maintaining flexibility in agreements. Procurement Best Practices for Success: The mining industry's susceptibility to economic conditions, commodity value fluctuations, and changing regulations necessitates a strategic approach to procurement. Leveraging SpendEdge's expertise, a mining company overcame operational challenges, including market fluctuations and the need for improved equipment. Through the implementation of procurement best practices, the company enhanced production, minimized risks, improved supplier relationships, and successfully navigated market dynamics.

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