The second article on dynamic discounting comes from Torsten Budesheim, Director of Marketing at Taulia Inc (www.taulia.com).In our recent study – so far 75% of the respondents have not used or even looked into dynamic discunting and supply chain financing. This is not a statistical truth but my belief is that we are only seeing the beginning of these cash flow and working capital tools in the Nordics.
The raised questions were:
- The reason for extending payment terms being to use suppliers as the “bank” – how can you evaulate that you will not make the 2 or so percent anyhow through using the money as an investment in the production or in your own business for instance?
- Have you come across companies that have extended their “real” payment terms from for instance 60 to 90 days just to go back and asking for early payment discount after 60 (which then are their “real” and accounted for terms?
- Can you give examples of industries (buyers) and products/services (suppliers) where dynamic doscounting or early payment is growing and why?
- Is dynamic discounting and early payment bringing finance and procurement closer together?
The answers were:
“Generally speaking, long payment terms without dynamic discounting or third party supply chain finance solution will put significant stress on supplier relationships and increase a company’s supply chain risk. Following is a short blog post that elaborates on that: http://bit.ly/zxQqW1
From what we have seen at Taulia, companies that have 60 days or longer payment terms with their suppliers or plan on implementing such payment terms do this to reduce their working capital requirements. It contributes to corporate cash balances outgrowing strategic liquidity requirements. Take a look at the following gtnews article that goes into more detail on this: http://bit.ly/uSUwUt
Regarding your individual questions, I have some additional comments:
1) Discount rates of 2% as commonly used in the “2% 10 net 30” payment terms translate into an annual rate of 36%. That’s a savings opportunity that you just can’t ignore. It will also be very difficult to match or even beat this rate through other investment vehicles. Even the return from a company’s core business is most likely not able to keep up with such a rate. Dynamic Discounting takes the concept of traditional (static) discounts and eliminates their shortcomings. It makes time-variable discounts available throughout the entire payment term and on 100% of the invoice spend; Even on the spend portion that has Net-payment terms, by offering on-demand early payment to suppliers. For Global 2000 companies, this translates into a recurring multi-million dollar savings opportunity.
2) See my comment above and the article I’m referring to. Awareness at large organizations about Dynamic Discounting is increasing. Companies are starting to appreciate the benefits and the savings they can realize from it, instead of letting third parties, such as banks and factoring companies, profit from the supplier’s cash flow needs.
3) By offering large buyers a way to generate double-digit returns on their cash and providing their suppliers access to a less expensive financing alternative, Dynamic Discounting creates a mutual beneficial opportunity. As a result, we see demand for Dynamic Discounting across all industries.
4) With Dynamic Discounting both departments benefit and by jointly driving and leveraging Dynamic Discounting you could say that in fact they are moving closer together. In that sense, Dynamic Discounting creates a virtuous circle for procurement and AP on one side, and suppliers on the other”
Thank you Torsten and Taulia! We will speak about these tools at P2P Summit 2012, not the least with Pete Loughlin from Purchasing Insights – who was the first one to open my eyes to dynamic discounting: Pete’s article on dynamic discounting