One hundred and fifty different payment terms and a payables track record that was blowing away industry averages. That was the state of the art at American Electric Power. And, while suppliers were pretty happy being paid in record time, it wasn’t the exactly the most prudent way to manage the company’s cash flow.
“[It] caused us a little concern in that we obviously weren’t being overly prudent with our cash or gave that appearance,” remarked American’s Senior Treasury Specialist Rick Gray recently. “So part of the effort was to look at our payment terms and standardize them, and we decided to extend them a little bit to get along with the industry average.”
That meant looking at American’s entire purchase-to-pay (P2P) process, in order to improve its e-invoicing and e-purchase order options. Implementing a real-time approach to billing, ordering and settlement terms between buyers and sellers was the goal.
That’s when American turned to Ariba to explore the ways in which it could simplify the payment process for both customers and their suppliers.
Ariba Manage Cash Solution Marketing Director Drew Hofler explained that one of the greatest changes across numerous markets and industries is longer payment terms faced by suppliers, due in large part to the credit crisis easing. However, buyers don’t always have a lot of on-hand cash. With Ariba though, buyers can use their cash more prudently and earn some great return on it. Additionally suppliers gain access to early payment and can lower their days sales outstanding (DSO) when they want to.
According to Hofler, Ariba can enable early payment on an invoice funded by the buyer’s cash. Essentially, the company lets suppliers accelerate their payment process if they need to, either on an automatic or on an ad-hoc invoice-by-invoice basis.
“[Ariba] simply puts the tools in the hands of the paying customer, to use their and it puts the tools in the supplier hands to accelerate payment,” Hofler said in the interview. “I like to call it the bringing together of opportunity, visibility, and capability, where you have the opportunity created by e-invoicing and where now you have an early approved invoice.”
The integration process was manageable, according to Gray. The challenge, as it always is, was getting suppliers onboard and engaged, and that different stages of the implementation process sometimes took months to fully roll out.
Looking ahead, Gray added that American is working on a long-term contract, but its immediate goal is working with the smaller suppliers. “We’re looking to make sure that this becomes our culture within the company,” Gray said. “These are the payment terms and this is the tool to utilize going forward. We’re sticking to our guns, saying that there are no exceptions. Everyone goes through this, and that’s been beneficial.”