Dynamic discounting – A faster way to cash and closer supplier relationships

3 October 2013

Dan Hawker

Dan Hawker

Former Head of Tobacco, Wholesale & Retail

It is common practice in most markets for procurement teams at retailers to ask their suppliers to invest in growing their joint business. Whilst much of this is done in a collaborative manner through joint planning, some of it comes in a more, shall we say, direct fashion. In other words, asking for cash sums through summary invoice discounts, or upfront payments to be on a preferred supplier list.

Understandably, this kind of unilateral action generates more stress in the business relationship than a collaborative approach. And that stress usually results in a less productive relationship. I often refer to research done by John Henke on the US automotive market which shows that investing in supplier relationships in a genuinely collaborative manner can help not only reduce costs, but also increase revenue. Yet, still, it seems just as common for procurement negotiations to be conducted with a baseball bat, as it was years ago.

So it was with this in mind, that I found a recent overview of dynamic discounting from Ariba to be quite thought provoking.

Ariba is the newly acquired Supplier Network and Cloud-based procurement solutions company, within SAP. Dynamic discounting is a very simple, but powerful, variant of the traditional early payment discounts. In the past, terms were agreed up front - and they didn't change. As a customer, if you had a 1% discount agreed for a payment with 10 days, and you paid within 10 days, then you got the discount. If you paid in 11 days, you didn't get it.

Now, with dynamic discounting, it can be more flexible. If, as a supplier you have a cash-flow situation in a given month which makes an early payment discount attractive at that point in time, you can offer it via the solution, and the customer can choose to accept it or not. And, as a customer, if you are in an unusually positive cash-flow position at a point in time, you can offer a one-off discount which suppliers can choose to accept or not. You can also apply rules around rates of return to make the offers more sophisticated. 

What this means, is that there is a way for customers and suppliers to easily benefit from cash-flow drivers that previously would have been too difficult to negotiate on an ad hoc basis. And this method is choice-based, so a much more collaborative way of achieving the cash input that this blog started off with.

Worth a thought. Although I can see many buyers thinking of an X + Y situation, rather than Y replacing X!


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