Optimizing Supplier Discounts: Dynamic Discounting (Part 2)
In a recent post (part 1), we showed how optimizing supplier discounting through dynamic discounting can generate high returns on working capital – as much as 1% to 2% per month.
Through technologies and processes that add discounting flexibility at any point along the invoice-to-payment timeline, you can earn high returns plus enhance supplier relationships by giving them opportunities to improve their own cash flow.
Our newest white paper, "Optimizing Supplier Discounts,” presents four essential best practices for dynamic discounting. This 2nd post addresses the first two, which focus on giving suppliers incentives to participate.
Negotiate discounts with top-spend suppliers first
Not surprisingly, most of your returns will come from your top-spend suppliers. A few major suppliers likely represent most of your spend, so focus on these key vendors first before rolling out your program to all suppliers.
Before negotiating discounts, standardize all your payment terms, stretching them out if necessary to give suppliers more incentive to participate.
Top-spend suppliers probably represent your most strategic vendors, so be sure to meet with them on a regular basis to discuss payment terms in a way that nurtures relationships. Also be sure to keep your procurement organization involved in these communications to assure terms are properly written into contracts.
Give suppliers customized advanced technologies
Electronic invoicing is essential for maximizing flexibility across the invoice-to-payment timeline, so be sure to give suppliers access to these tools. With advanced technologies, suppliers can be reminded of discounting options – even encouraged to select one – while they’re submitting invoices online.
Through dynamic and flexible tools, suppliers can later change their minds and offer a higher discount even after an invoice is submitted. Your organization can also act more tactically – creating “ad hoc” discount offers when it suits your financial goals.
Remember that not all ERP systems are flexible enough to accept terms on an invoice-by-invoice basis, so work with your IT department to assure your financial systems can support dynamic discounting.
See part 3 in this series for two more essential best practices to further optimize supplier discounting.