Do your suppliers measure up?
What did you do the last time your bank let you down with one of its services? Did you call and complain until the bank righted the problem? Did you scribble note on the bank's report card you keep on file?
Part of leading a treasury department is managing its suppliers -- from banking institutions to software companies to processing services to financial-service firms. Measuring suppliers has evolved from subjective reporting of the latest problems to a formal report-card system to a process that now quantifies the impact of changes and uses statistical methodology. The evolution is a response to today's business environment, in which lean staffs, competitive pressures an more complex situations require you to establish lasting supplier partnerships rather than "name-only" alliances. The concepts of process management, which break traditional functional boundaries, and total quality management are the frameworks for taking an integrated, cross-discipline approach to measurements.
You don't have to be an expert in process management or TQM to benefit from measurement systems. The techniques are useful at any stage simply because they meet your objective of providing data that you can use to make informed decisions.
DIVIDE AND CONQUER
Where do you start to establish performance measurements?
* First, define the process you want to monitor. Identify your key objective and the elements critical to completing it. Prioritize these items by the amoun of "pain" each causes and identify the function or department that performs eac task. Ultimately, you should select a few specific data points that will help you monitor the process.
For example, in the stock-transfer process, one objective is to provide an easy timely and accurate method to transfer title of stock for the shareholder. Several functional areas could be involved: investor relations, public relation and communications, the treasury and the transfer agent. The critical elements include a reliable, single contact point, accuracy, ease of understanding and adherence to legal requirements. What you don't want (the pain) is for a shareholder to be transferred to several people, to be unable to understand the instructions or to have a transfer done incorrectly.
Take these defined critical elements and work with all the functional areas to establish an understanding of each task and how the process will meet your objective. Also, discuss the elements with your external supplier so it understands your specific service requirements. Soliciting your supplier's inpu may also give you additional useful practices, since your supplier can share other companies' experiences.
* Pick the best measurement method for your purposes. Above all, keep it simple. If your measurements are too complex and time-consuming to collect, no one will use them. It's important to measure just what you will use.
For example, say your accounts payable process, which includes funding check payments, dictates you must receive your second presentment notification for controlled disbursement by 10:30 a.m. You could measure either the number of times you receive the second presentment after 10:30 or the time of the second presentment. The first choice measures the error rate, which tells the bank tha there's a problem with its process that's having an adverse impact on your operations.
The second choice requires you to collect more data but gives you more information to use. For instance, if 95 percent of the time you receive the second presentment by 10:15 a.m., is this an opportunity for you to accelerate your process? If so, what's the benefit? If you'd never benefit from earlier notification, don't waste the effort collecting presentment times.
Choose measurements that will truly indicate how your supplier's performance helps you meet your objective. Say you have a control objective of separate confirmation of foreign-exchange trades. You define meeting this objective as the receipt of a confirmation of the trade by a designated person or function other than the trader within 24 hours. If you trade with a supplier who's consistently late or sends the confirmation to the wrong place, not only can yo not achieve your control objective in a highly risky area, but you also incur rework costs as you chase and reroute documents.
Finally, it's not unusual to change measurements. Information you initially fin meaningful may not prove useful later, or you may change your process based on the data you collect and so have to also change the measurement.
* Collect data efficiently. Choose the simplest route possible here, even if it means some manual work. Perhaps you track the volume of wire transfers and error rates. Try using a posted, manual chart in the work area. It can be easil updated daily because the information is simple (the number of transfers, the number of errors), and it doesn't require any calculations or interpretations. It also serves the additional purpose of communications: The data is accessible and the visual presentation may serve as a catalyst to generate ideas (like "Ou volume is increasing significantly. Should we use automated clearing house payments instead? Should we more actively explore electronic data interchange?"
It's to your advantage if your supplier understands quality techniques, because the firm already may be measuring the same critical points to the process and can share this data with you. Your supplier also can share the performance records of its total customer base for your comparison.
At this stage, the issue often becomes not who collects the data but how it get to you. As the partnership with your supplier develops, you may gain access to specific areas of the supplier's computer system to receive data electronically when you want it. While this may pose computer-security challenges, it streamlines the collection and reporting tasks.
* Communicate your results as widely as possible. Everyone involved in the performance-measurement process should have access to your measurement results because everyone should be using them. If possible, put the data on your local area network for convenient, real-time access. Also, devise a mechanism to report any actions taken based on the data. People need to know the impact of the information that they've made an extra effort to collect.
Share the results with your suppliers frequently, too -- and not just when problems occur. This allows you to use your suppliers' knowledge base continually. Such ongoing discussions contribute to joint redesign efforts.
As an example, look at how a supplier could use the data flow in the earlier disbursement example: If the presentment is late due to a system problem, does ABC Supplier develop a backup system or method? Longer term, does ABC need a system upgrade to meet your objective -- and does it have the commitment to mak the upgrade? In the short term, how does it deal with the communication's lateness? Will someone phone you with the data, notify you that the information is now available, or let you guess what's happening?
Likewise, since ABC monitors this critical point, does it share the data with you, providing you with a measurement service? Does it also use this database t market the service to its prospective customers? If ABC knows you need the data because of your investment process, does it resolve the late notification problem by developing alternative investment options with you for the cash difference that may occur?
These examples illustrate the difference between a good supplier and a good partner. A good partner actively and creatively works the process for your mutual objectives.
LOOKING FOR A MATCH
Measuring your suppliers' performance gives you a powerful data point from whic to manage these relationships in total. You can use the measurement-establishment process to select and maintain relationships with the best suppliers for you. For instance, as you look at your company's primary banking group, compare your service requirements with the expertise of the group. If they don't match, odds are the relationship isn't mutually beneficial (By the way, each bank is usually performing the same analysis on you!)
Communicating your current and future service requirements and objectives will enable the bank group to focus its calling efforts and products specifically fo you. That avoids wasting your management time and the bank's time pitching products that don't fit your profile. Sharing data can also generate ideas. Often suppliers are willing to work with you to devise a new way to perform a service because they realize they may be developing a new product. Brainstormin is good business for both partners.
If you decide to change suppliers, the request-for-proposal process can be very straightforward for reviewing candidates. Since you've defined a particular process and measured its operation, your RFP will clearly discuss your requirements. The suppliers either meet the criteria or they don't -- it's an objective scorecard. This also simplifies your discussions of the results of th selection process with the suppliers you don't choose, because you have objective data to support your decision. Plus, it gives the relationship managers who don't get the contract excellent feedback to use in explaining why they didn't win the business.
You can also use any qualitative criteria you collect from the RFP responses. For example, if you've narrowed the candidates to two excellent suppliers who are equally capable but one uses quality tools and techniques with more sophistication than either you do or the other candidate does, then contract with this supplier. You'll get an opportunity to upgrade your own TQM skills an get top-notch service at the same time.
THE COMMERCIAL-PAPER CAPER
How do you establish measurements? Take, for example, issuing commercial paper, which seems a fairly simple, easy-to-measure process. Most companies use one or two dealers and contact them with issuance criteria; the dealers place the pape and communicate the terms to the issuer. The most common measurement is the issuance cost for the issuer's credit category, compared to the composite for a comparable time period.
But look at issuing commercial paper as a step in a process. When you issue any debt instrument, one of your primary objectives is to do so at the lowest possible cost. That's why you compare the issuance cost to the composite. However, some costs can be embedded in the issuance process beyond the net issuance cost that you may not measure.
Commercial-paper issuance is actually the last step in a process that begins with cash forecasting. Intermediary elements leading to the decision to issue include the daily cash positioning, management positions on interest-rate direction as well as economic and financial market data, and short-term versus long-term maturity placements. This process includes several external suppliers such as one or more dealers and an issue-and-pay agent. Behind each step in the process lie the subprocesses that affect your overall objective. Since each ste affects the outcome in some way, you can see how it's inadequate to just measur the issue cost against the composite. Instead, start with just one or two quantifiable measurements for each subprocess.
You can use identical, simple measurements for both cash forecasting and daily cash positioning if you interpret these as the long-term and short-term subprocesses for the timing of maturities. Try such measurements as overdraft fees (if the issue fell short of the requirements) and the negative carry (issued more than necessary, requiring an investment at a lower rate than the paper cost). These are quantifiable measurements of the pain of inaccuracy. Obviously, as you review these costs, you must go further in each process to identify the variances and determine why they occurred.
You can best measure interest-rate views and market data by documenting your views and decisions with your corresponding actions. The quantifiable impact will be part of other measurements. For example, if management believes the company is in an increasing rate environment, one decision is to extend maturities. This may result in some mismatches of maturities with cash inflows, requiring investment. If management is correct and rates do increase, the investment income will be greater than the issuance cost, adding value to the program. If the rates decrease, negative carry may again result. (As you can see, the negative carry measurement has several components through the process. Your documentation gives you an historical track record, as well as a database of your actions and their impacts, to aid in future decision-making.
When it comes to the dealer, the objective is a timely, accurate issuance at a competitive rate. Look at the dealer's issuance rate compared to that of co-dealers and to the composite. Also, look at the number of late notifications of issuance data and the error rate (incorrect amounts, maturities and so forth). This is also a good place to incorporate your market discussions with the dealer into the interest-rate and market-view decision process. One dealer may be more helpful than others, which adds value to the relationship.
With any error-rate measurement, measure the number of errors against the numbe of days the issuance occurred, not just the number of business days. Ask yourself, what is an acceptable number of errors? How much do errors cost -- in direct dollars (for example, did the error result in an overdraft, idle cash, a unfavorable issuance cost?) and in indirect dollars (say, two people worked one hour to correct the error)? If you have a lean staff, a lot of rework may be unacceptable because you have no one to do it. If collecting the error rates requires you to staff this process, this also is a cost of your program, so you need to change the process or capture the cost in your issuance cost.
For the issue-and-pay agent, look at the accuracy of the issuance and whether the funds were on time and correct.
For data collection, you must gather the information on the internal processes of forecasting, cash positioning and market views in-house. But you may find your dealer collects the measurements on the issuance rate and errors for its own purposes so you can use that information.
Like other measurements, many of your measurements for commercial-paper issuanc become part of a feedback loop that may influence your debt or investment management; therefore, you must continually communicate them. Although this lends itself to real-time access, paper-based reporting is acceptable, particularly if your company has a daily or weekly operational meeting to discuss such items as issues, market views and upcoming events. In that case, you can use the forum to communicate the data and then show how you'll use it.
You may need to communicate daily with your dealer for some measurements. For example, you should immediately discuss any differences in the issuance cost, particularly if you see a trend. Don't wait until the quarterly meeting with th big bosses! During these daily exchanges, you also may want to discuss your dealer's market view, solicit its feedback on your issuance plans and get information on your investor base. In short, think of your dealer as another player in your debt-management process. And use all of these items to measure the quality of your dealer and the evolution of your partnership.
A good feedback loop with your dealer could result in the following:
* You get more information that may affect your issuance decision and potentially lower your costs.
* Your dealer calls you for additional issuance or for an issuance on a day when you don't need funds. The cost of the issuance may be so attractive, you make the deal.
* A good understanding of your issuance pattern allows the dealer to market you to investors in a manner than ensures demand.
* Your dealer is very flexible, so you can easily add to your original reques or even cancel it under some circumstances.
* Your dealer works with the issue-and-pay agent to establish the notificatio electronically once the issuance is complete.
* The dealer's capital-market area presents some debt alternatives. If your issuance is "low," and you have a large backup facility, your paper issuance ma be more expensive than you think. Your dealer can discuss the impact of having an unbacked or less-than-100-percent-backed facility and offer other short-and long-term debt ideas.
CREATIVITY ISN'T EASY
Operational areas lend themselves to the measurement process because you can easily define objectives and tasks to successfully complete them. But other financial areas -- such as corporate finance, risk management and credit management -- pose a challenge because it's difficult to use traditional measurement methods.
In general, if the process requires a lot of creative or negotiating work, or i it doesn't follow a routine path, the impact of your decisions and actions will be difficult to measure. However, just because it's difficult to measure doesn' mean you can't or shouldn't do it. Persevere -- because performance measurement are a powerful tool for managing financial functions.
If you aren't oriented in the methodology, getting started may be tough, but once you're on the path, the process becomes addictive. Standard deviations, throughput volume, rework costs, production timeframes, costs per item, customer/supplier joint ventures -- these now are measurements for financial staff functions, not just a production facility!
10 WAYS TO AVOID SNAGS IN YOUR SUPPLIER RELATIONSHIPS
1 Make sure your suppliers are at least at the same level of quality management as you are -- and that they are committed to maintaining, or even increasing, this level.
2 If your process may result in a new product, insist on high-level support within your suppliers' organizations.
3 Keep in mind that if your process requirements are an exception to a supplier's process, the potential for errors and untimely handling is higher, and that could mean a higher cost. Translation: Don't let a service be a loss leader for the supplier.
4 Find out up front if you are part of the beta test for a product or service, because that will significantly affect the implementation, ongoing support and pricing.
5 Don't computerize for the sake of computerization. Investigate fully before you commit to electronic communications, since they may actually be more difficult to use and costlier than paper.
6 Do an onsite review of our suppliers' operations. This is critical for effective decision-making because it gives you a chance to meet the employees who may handle your account and you can watch the process in operation.
7 Investigate the processes the suppliers use to handle problems.
8 Compare pricing. If one supplier is clearly below the market rate, you may be in for a significant increase in the next contract period.
9 Never give feedback without data. Doing so makes taking appropriate action difficult and can ultimately erode the relationship.
10 Have the courage to pull out of a relationship if it isn't working. Staying with a substandard supplier is costly -- in rework and in dissatisfied customers.
Ms. Ambrose is a visiting fellow at Carnegie Mellon University in Pittsburgh, Pa. She's the former vice president and treasurer of Aluminum Company of America.
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|Title Annotation:||Treasury Management; includes related article|
|Author:||Ambrose, Mary Lou|
|Date:||Sep 1, 1994|
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