If you were fortunate enough to attend the Sharedserviceslink Dynamic Discounting and Supply Chain Finance Summit that I chaired in February, you would have experienced two days of high quality discussions with senior Finance, Treasury and Procurement professionals. The focus of the Summit was how to capitalize on early payment discounts and supply chain finance. If you couldn’t be there, here are some of the the key takeaways from the event.
1. Ensure organization alignment (Procurement, Finance and Treasury).
This will minimize internal delays around invoice approval and ensure that your early payment programs are high performing. Singularly the most important factor in the successful of a project.
2. Integrity counts.
If you take a discount, pay early according to the terms (clock usually starts when invoice goes into the ERP system) – just like any other business agreement, an early payment program’s success hinges on integrity shown by both the supplier and the buyer. Otherwise you risk loosing the valuable partner and the cash!
3. Beware of shifting the financing opportunity into cost of goods sold.
The key is to ensure that price negotiation is based on a fixed net term. Then separately target collections with your financing program so they have options to be paid earlier. Contracts need to include standard net payment terms and e-invoicing requirements up front.
4. Cash has value to suppliers or “Net Never” would be the standard term.
Suggest “Net Never” as a Sourcing best practice to reveal the supplier’s real cost of capital during supply chain finance implementations. This helps establish that there is real value to low cost bank financing in supplier negotiations.
5. SCF is a paradox: suppliers get paid sooner and you extends NET terms.
This paradox is why many sourcing groups are initially skeptical about SCF. Giving suppliers cash at the buyer’s cost of capital creates real value for both buyers and suppliers. It’s not snake oil and is why all major companies should be considering this technique.
6. Don’t pound a nail with a screwdriver. You need more than one tool.
Dynamic discounting, Supply Chain Finance, and BIP Card Programs are key tools that fall under the umbrella of optimized working capital. You should be opting to use more than one program – done right, they are complementary not conflicting!
7. Micro-target suppliers – fit terms to your approval cycle by supplier.
All suppliers are not the same and an optimal program accounts for this. There are two variables to manage: (1) price sensitivity of the supplier and (2) length of your approval cycle – you can’t offer a 2%10 NET45 term if it’s taking you 22 days to approve the invoice.
8. Squeeze supply chain costs, not just supplier cost (drive low cost capital).
Think in terms of the collective cost structure of your supply chain – injecting low-cost capital into YOUR supply chain ultimately strengthens suppliers and reduces your costs. If done correctly you’ll end up with a healthier, more agile supply chain and stronger supplier relationships.
9. Best performing Early Pay Programs get funded by extending net terms.
These go hand in hand. Extending net terms increases supplier demand for early payment, increasing participation and discounts. Suppliers who choose not to get paid early instead get paid later, creating new cash which in turn funds early payment to suppliers who do.
10. Top quartile gets $3-$5M savings/$250M cash per billion of spend.
Several companies presenting at the event shared their experience and confirmed these figures are realistic. The spend must be targetable (no taxes, real estate, etc.).
These key learnings demonstrate why both buyers and suppliers have a lot to gain from Early Pay Programs. For many, it fuels growth and beats alternatives financing options including factoring and bank debt that are often high prices and replete with financial covenants.