Improving payments to suppliers
The following is a short case study on how British American Tobacco (Holdings) Limited (“BAT”) has improved and enhanced supplier payments in compliance with the UK Prompt Payment Code (“the Code”).
Tell us what inspired you to do something different?
As one of the initial signatories to the Prompt Payment Code, BAT has always recognised the importance of working in partnership with suppliers, and the pivotal role they play as we build A Better Tomorrow™ by reducing the health impact of our business. While we were paying on time, only 73% of our invoices were being paid within 60 days, and to truly adhere to the spirit of the Code, there was work to do. As a result, we undertook a full review of our payment processes over the past three years to evaluate what we could do differently.
How did you manage the change?
We identified several changes – some small and simple, some more complex – that needed to be implemented. Having consistent board level support was important and became even more so as we navigated the COVID-19 pandemic and its wider economic impacts.
Underpinning this behavioural shift across BAT was a drive to improve internal awareness. Simple communication and repetition of the need to support our suppliers were integral.
Key areas of focus included:
- Assessing our payment terms – we actively sought to reduce our previous terms to support our suppliers, where necessary
- Reviewing our scheduled payment runs – by increasing the frequency of payment runs, we are better able to pay in line with specific due dates
- Redesigning our payment processes – including an invoice in the payment run preceding the due date, or ensuring a robust process to approve “urgent” payments are adhered to, reduced the risk of unintended late payments
- Revisiting our systems – implementing a new purchasing system across the Group (Coupa) increased visibility of where payments are in the process, reducing the risk of approval delays and enhancing our internal efficiencies
- Engaging with our suppliers – encouraging suppliers to utilise Coupa or to send e-invoices directly to our payment centre removed transit delay and the risk of misplacing records
- Seeking to batch invoice – for high volume suppliers, we reduced the volume of invoices by consolidating work/services onto fewer invoices, allowing us to be more efficient, and increase our ability to pay suppliers on time
- Internal review of our own data – ensuring payment terms were appropriate and supplier information was up to date reduced missed or incorrect payments
- Regular oversight of performance – we introduced a cross functional, monthly meeting of the key teams involved, to assess performance and ensure any issues were resolved.
What has been the impact?
We have consistently improved our performance, reaching 95% of all invoices paid within 60 days (for April 2022).
The above processes and systems have enabled us to save time while increasing efficiency. While this required some initial investment, it has been worth it to support our suppliers.
How did the new regulations related to small companies impact BAT?
We are extremely proud that, in April 2022, we paid almost 95% of all invoices from small companies within 30 days, up from less than 60% in the second half of 2021.
This necessitated a thorough assessment of our supplier data in the UK to determine if they met the small company definition. We sought to confirm directly with our suppliers and, where we could not, we proactively rated a supplier as small for the purposes of payments.
For all those classed as small, we immediately reduced payment terms regardless of the previously agreed terms.
As we engage new suppliers, our enhanced process ensures we know if a UK supplier meets the small company definition. We have also included a new clause in our purchase order, requiring companies to let us know if they meet the definition to ensure we can pay in line with the code.
Do you have any final thoughts?
Enacting and embedding change takes time and is not easy. Reducing payment terms, or proactively paying early has an impact, be it process changes, system overhauls or economically through working capital, and for BAT it was not insignificant. However, a clear mandate and direction, with cross functional support delivers results.
There will be challenges, and the data will vary from period to period, but by challenging the status quo, being unequivocal in our desire and looking at things differently, we are committed to building A Better Tomorrow™, including for our suppliers.