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Building Vendor Relationship through Purchase to Payment Policy: A Case Study of FMCG Organization*

CASE STUDY, SUPPLY CHAIN MANAGEMENT
ET Cases - GSMC, 8 Pages
AUTHOR(S) : Aswini Anandane (Dept. of Management Studies), Dr. S. Riasudeen (Research Supervisor, Dept. of Management Studies), and Dhruv Shankar Dutta (Research Scholar, Dept. of Management Studies) - Pondicherry University

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Building Vendor Relationship through Purchase to Payment Policy: A Case Study of FMCG Organization

India Unilever Limited, one of the leading Fast Moving Consumer Goods (FMCG) companies, outsourced most of its payment activities to MNCs like IBM. India Unilever  Limited considers its supplier relationship as its most essential activity and focuses on achieving efficiency in its payment process to the suppliers. This led to good  rapport with suppliers and helped the company retain its position as the market leader. The company was functioning smoothly and did not realize any problem in its  payment activity until the new Account Head, Mr. ABC, joined the company in December 2013. He started using SAP software to keep a track of the payment process to the suppliers. Based on the data gathered from January to May 2014, he found that most of the time payments to the suppliers were delayed. Mr. ABC decided to recruit Miss XYZ as the Consultant to analyze the data and give a recommendation to improve the payment process. Miss. XYZ had to address how the delays were happening and identify the sources of those delays.................

India Unilever Limited: Background

India Unilever Limited is India’s largest FMCG Company with a heritage of over 80 years in India and touches the lives of two out of every three Indians. To achieve this position, maintenance of supplier relationship is very essential. India Unilever has factories all over India and it has set standards for all the factories in India for which each factory earns points based on their payment efficiency. This is carried out by India Unilever to ensure proper standard and to retain their market leader position. In the set standards by India Unilever, P-2-P1 holds important position because IUL considers it to be the base for proper and continued production..........

P-2-P

P-2-P is one the important indicator of operational efficiency of the company. It refers to purchase to payment which describes the process of payment to the suppliers after the invoice is raised by the suppliers. If proper payment is not ensured then the company may be pushed to the condition of losing their suppliers which will in turn affect their production. To ensure efficient production maintenance of suppliers is very essential. For maintenance of suppliers payments should be done promptly.............

Current Situation

On June 1st 2014, Miss XYZ has been provided with the data collected by ABC during January-May 2014.The data given by ABC was classified into various types of delays for the better understanding and have been shown in Exhibit II. The data had been classified into four categories namely late invoice receipt, Payment delay, Processing delay and Short term receipts on the basis of payment policy followed in India Unilever Ltd..........

Late invoice receipt

Late invoice receipt here means those delays which are due to receipt of invoice by the company after the due date is over. Sometimes suppliers generate the invoice as soon as the order is placed by the planning team of India Unilever limited rather than generating at the time of dispatch of goods. Due to this early preparation of invoice, due date gets over before goods get delivered to India Unilever. Calculation of due date follows the agreements made by India Unilever and the supplier based on the type of goods.............

Short term receipts

Short term receipts here mean those delays which are due to delay in the release of payment from within the factory. Few payment terms are generally within three days. For such payments the factory itself releases the payments rather than outsourcing the payment process as in previous case. It was observed that in each month there were many short term receipts but only one person was given the authority for releasing the payments and that person was given authority to release payment from only one bank.............

Payment delay

Payment delays are those delays where the Iron Mountain team does not release the payment on time to the suppliers. The details of some of payment delays are shown in Exhibit V which explains that GRR is run on  time but the delay occurs due to late payment release by the Iron Mountain team functioning in Bangalore. It was also observed that payment delay occurs mainly.............

Processing delay

In the previous case the delay was due to late release of payment by Iron Mountain but no delay on the company side. But in this case the delay happens due to late scanning of bills by the P-2-P team of India Unilever............

Decision Points

Based on the data of the various delays and description of these delays, Miss XYZ had to do the analysis and come with the suggested decisions to be recommended to Mr. ABC for implementation to remove the existing delay issue................

Exhibits

Exhibit I: P-2-P at India Unilever Limited

Exhibit II: Summary of Various Types of Delays

Exhibit III: Late Invoice Receipts Details

Exhibit IV: Short Term Payments Details

Exhibit V: Payment Delays

Exhibit VI: Details of Processing Delays

Teaching Note Preview

Building Vendor Relationship through Purchase to Payment Policy: A Case Study of FMCG Organization

 

Synopsis

This is a real time case, which will make the student understand the reason which can affect the firm performance and what kind of corrective measure the manager has to take to make the situation come under control without affecting the fund flow and the operating efficiency of the firm. India Unilever allots fund for the respective quarter and only then they start their operations. If within the quarter, there is no proper flow of funds and if there is a delay in payment release then it will affect the estimation, which will be done for the next quarter, and it will continue so on. The operating efficiency of the firm will be affected because if the  supplier does not receive payment on time he will stop executing the next order until he receives the payment. Because of this, the raw materials which are essential for production may not reach the factory on time which will lead to production loss which in turn will affect the operating efficiency of the firm.

The case describes the purchase to payment process of one of the leading FMCG Company in India. It explains how the company manages the payment activity of its supplier. The case also focus on how does the company decide of which payment to outsource and which one not to. It further highlights the issues faced by the company in the current purchase to payment activity and highlights the factors, which hinder the operational efficiency of this process.

The case has also classified one of the issues faced by the company, payment delay, into different categories and has explained how does that happen and what are the factors responsible for that. This case will have useful implication in the field of Process designing and operational efficiency domain.

Pedagogical Objectives

The major learning objectives of this case fall in the domain of process designing, operational efficiency and strategic decision-making. The objectives of these three domains are as follows:

  • Process designing objective: The case discusses about the current process followed by the company to pay its suppliers. So the objective here is to understand how well the process is designed and to find out the problem areas, if any, in the current process.
  • • Operational Efficiency objective: P-2-P is one of the important operations of the company. The efficiency of this operation decides the efficiency of overall operation or process followed by the company. This is validated by the fact that raw materials are very important for the continuation of the production and to make this raw material easily available, it is important to have good relationship with supplier.........
  • Strategic decision making objective: This case is one of the novel examples of strategic decision making. In the current process, the company has outsourced most of its payment activity, but not all.............................

 

Assignment Questions

  • I. Is the current P-2-P followed at Indian Unilever efficient? If no, what are the areas, which cause the inefficiency in this process? (Look at exhibit 1 for the current P-2-P at Indian Unilever). Limit yourself with finding efficiency in terms of time and the areas, which cause inefficiency.
  • II. Have the classification of payment been done in correct way? You may like to judge in terms of technique and data used.
  • III. ...................

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Abstract

This case study analyses the payment system of a leading FMCG Company in India regarding the payment release policy to its vendors. The company outsourced its payment system to a leading software organization for releasing the payment through NEFT and Cheque, if the credit limit is within three days the company itself makes direct payment to its suppliers. In spite of such a regulated policy the company delayed the payment to its vendors due to tracking system. This caused delay in supply of goods resulting in production loss. This case study aims at taking corrective measures to improve the payment policy standards and enhance productivity. The  understanding from this case study will have implication in the area of fund flow management and achievement of operation efficiency through financial activities.



Pedagogical Objectives

The major learning objectives of this case fall in the domain of process designing, operational efficiency and strategic decision making:

  • To understand how well the process is designed and to find out the problem areas, if any, in the current process
  • To understand how efficient the P-2-P process of the company is and to understand the factors which have impact on the operational efficiency of this process
  • To understand the current way in which this activity is going on and to take strategic decision like which activity to outsource, what should be the criteria to decide on outsourcing of the payment activity, whether to go with one partner to perform this activity or collaborate with more


* GSMC 2014, IIM Raipur

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