At many companies, the procurement function has evolved from a price-only focus to a total cost of ownership perspective, with a lot of best practices and tools to enable good results. But is that enough to impact the long-term success of your enterprise?

As most finance professors will tell you, the long-term success – even viability – of a company depends on its Return on Invested Capital (ROIC) in relation to that company’s cost of capital. ROIC is defined as the profits of a business divided by the total capital invested in the business (equity and long-term debt).  When ROIC exceeds the company’s weighted average cost of capital, "economic value" is being created. In other words, shareholder value is being enhanced. When ROIC is less than the cost of capital, the company’s health is eroding. If the situation is not corrected, eventually the company’s viability is threatened.

Supply management is in a uniquely powerful position to drive improvements in ROIC. As you’ll note in the figure below, supply management can play a role in each of the major drivers of ROIC:

In this article we’ll take a closer look at the subject of improving capital intensity.

Payment terms offer an opportunity to add real value while giving your suppliers a chance to demonstrate their creativity. As an example of the value, for each $ 1 billion of annual purchases, going from Net 30 day terms to 1% 15, net 45 offers you the option of either:

* paying sooner and taking the 1% discount (worth about $ 10 million to the bottom line, less the cost of interest foregone on the cash used to pay early; or a net benefit of about $ 8 million in today’s interest rate environment), or

Not surprisingly, Procurement departments are increasingly including payment terms in their RFPs, or simply communicating new "standard terms" to their supply base.

A word of caution on payment terms:  be careful how and where you implement your planned changes. The worst implementation I heard about involved a company (let’s refer to them as "Company X") whose procurement department wanted to make a quick win by "demanding" new payment terms of net 60 days from all of its suppliers. At least one of X’s suppliers, Company "Y", was also a large customer of Company X. In fact, Y was such a large customer that their purchases from X dwarfed X’s purchases from Y. You can probably anticipate what happened. Shortly after Y received the demand for 60 day terms from X, Y sent a similar 60 day demand to X. Because of the imbalance between the two parties’ purchases, X was worse off than before it began its "payment improvement initiative." Its accounts receivable with Y grew more than its accounts payable did, thereby adversely affecting corporate cash balances. This is not the way to earn your 15 minutes of fame.

The message is simple: understand the benefits of new payment terms, but don’t blindly implement an across-the-board demand. Live up to contractual commitments. Be conscious of the interplay between what you are trying to achieve with accounts payable, and the possibility of adverse changes to your accounts receivable when you have a broad relationship with the other company. Finally, be aware that payment terms vary widely around the world and, to be successful, you must take into account those regional differences.

Inventory offers at least two opportunities for procurement to contribute and add value. First, inventory is another opportunity area for suppliers to be creative. For sizeable companies, supplier inventory terms and consignment programs can often free up tens of millions of dollars in working capital. Include inventory in your RFPs and let your suppliers provide you with their proposals. Second, there are some powerful new optimization approaches relating to inventory. Procurement can play a role in sponsoring the evaluation of these approaches and using them to speed up inventory turnover and reduce uncertainty in inventory planning. The more complex your supply chain, the more value offered by these inventory optimization approaches.

An often-overlooked opportunity to improve capital intensity is "asset recovery." Most companies have idle plant and equipment. Companies that have been restructuring themselves often have significant amounts of idle plant and equipment at multiple locations. Good asset recovery practices start with identifying and cataloging those surplus assets, and sharing that information across the organization. The objective is to avoid spending hard cash for new equipment when similar equipment might already exist as surplus at another of your company’s locations. If the idle equipment ultimately proves unusable internally, the next step is to monetize that asset by selling it on the used equipment market (often with the assistance of a specialized third party). Properly designed and administered asset recovery programs can generate millions of dollars of annual benefit to medium and large companies. Given the skill sets required to successfully design and administer asset recovery programs, procurement is the right department to manage that activity.

Last, but certainly not least, is the area of capital projects. Procurement, working with suppliers, can offer tremendous value if involved early in the process of conceptualizing and defining capital projects. Early, strategic involvement of procurement in capital projects offers the potential to reduce both total project costs and project timeline.

To ensure the long-term viability of organizations, procurement must drive not only cost reductions, but it should also drive improvements in other areas that impact ROIC. Improving capital intensity represents an area where procurement is uniquely positioned to take a leadership role and generate significant value.

Robert A. Rudzki is President of Greybeard Advisors LLC ( www.greybeardadvisors.com ), a firm that assists enterprises to improve their financial performance. Previously, Bob was Senior Vice President and Chief Procurement Officer at Bayer Corp. He is co-author of the just-released bookStraight to the Bottom Line. He is on PURCHASING's Editorial Advisory Board.