If Ever There was a Time to Talk to Suppliers about Dynamic Discounting – it’s Now

If Ever There was a Time to Talk to Suppliers about Dynamic Discounting – it’s Now

Posted by Pete Loughlin in Dynamic Discounting, Dynamic Discounting 09 Mar 2010

Discounting isn’t new – but being able to put it into practice is something that,  for many companies was just not practical until now. Dynamic Discounting allows suppliers and buyers to collaborate on payments in a way that wouldn’t have been possible 10 years ago and today, the economic conditions have created a perfect storm that makes dynamic discounting compelling.

How does Dynamic Discounting Work?

The supplier offers a discount for early payment. The earlier the payment, the greater the discount.  Historically, it’s not always been easy to achieve arrangements that work for both supplier and buyer and because of practical problems, it hasn’t always been easy for buyers to actually pay early.

But with the increased use of Purchase to Pay technologies and methods there is now no reason why a supplier cannot pay promptly – or late for that matter – depending on how the collaborative arrangements with the supplier have been agreed.

So why is Dynamic discounting so compelling? Just consider what a 2% discount means for early payment in terms of return on capital. If, instead of earning interest on your cash you invest cash for 20 days to get a 2% return – that’s over 36% return on capital.

Sure, you lose interest on that cash for 20 days! But how much? Even if you can get 5%, that is still just over a 0.25% that you lose far less than then the 2% you gain. That early payment may be inordinately valuable to your supplier who values cash flow more than high margins.

And this is the point. For many suppliers credit is either difficult to secure or expensive. By working closely with customers and leveraging the power and flexibility of a P2P system, they can create a genuine synergy that reduces prices, reduces the cost of borrowing and ultimately – reduces the cost of doing business.

Your P2P or procurement software vendor will show you how to get Dynamic Discounting up and running or you could research these vendors: Taulia; Ariba; The Receivables Exchange.

 

  • Fabien Jacquot April 20, 2010 at 10:23 am /

    Very concise article but also self explanatory video.
    I would just take this opportunity to add that should the buyer be not willing to use its working capital to settle early part of all supplier invoices, a bank can be tasked to run payment for a portion of the supplier portfolio.

    In this scheme, it would achieve 3 benefits :
    -still leveraging P2P automation
    -getting a ‘commission’ from participating bank(s) replacing the discount
    -when cash rich having the choice to pick & mix between direct payment (attractive discounts) and bank settlement (commission).

    Fabien Jacquot – Corporate LinX

  • Dynamic discounting - a purchase-to-pay option for better cash control October 22, 2010 at 7:53 am /

    […] >>Dynamic Discounting […]

  • Lean Education January 14, 2011 at 5:32 am /

    Organizations receiving discounts from suppliers for early payment is nothing new. For decades, Accounts Payables (A/P) departments have been making use of early settlement discounts..

  • Peregrine January 14, 2011 at 5:47 am /

    You are absolutely right of course but for many organizations the ability to pay promptly in a predictable way has meant that a discount strategy has been somewhat hit and miss. By applying P2P techniques and technologies much greater control can be gained allowing more discounting

  • […] Recent trends are driving savvy companies to improve how they manage their supplier and buying processes using dynamic discounting. […]

  • […] Recent trends are driving savvy companies to improve how they manage their supplier and buying processes using dynamic discounting. […]

  • T Collins June 1, 2012 at 2:15 pm /

    Dynamic Discounting is rapidly gaining acceptance among AP departments at large corporate organizations because it can save buyers up to 0.5% of their annual spend. Taulia’s Dynamic Discount Optimizer maximizes your AP department’s revenue generating potential by offering your suppliers early payments and dynamic payment terms.

Post a comment