Supply Chain Specialist

Using Xelix’s light-touch technology removes any need for complicated IT investment or time-consuming supplier onboarding

Supplier discounts: rethinking the role of finance

Seeking discounts from suppliers can all too easily look like the business of procurement rather than finance. But new technology is changing this, especially in the area of early payment discounts, where finance has a strategic opportunity to innovate. Taking ownership of this area also offer CFOs a unique chance to build a bridge into procurement and help support a function that is often viewed at loggerheads with finance.

The corporate benefits are significant and far-reaching because early payment discounts can reduce cost of goods sold, improve returns on cash, whilst strengthening supply chain security.

Traditional discounts are inflexible

It’s true that early payment agreements are traditionally negotiated up front by procurement alongside volume or bulk discounts as part of the horse-trading between buyer and seller. The procurement manager will want to drive the hardest bargain without compromising the commercial relationship.

In these circumstances, early payment is locked in and the supplier has no control. They lose margin whether they need early payment or not and the vast majority of suppliers will reject such discounts because of their inflexible nature. Dynamic discounting is different. It is more opportunistic and based on the constantly evolving dynamics of the buyer’s cash position and the supplier’s working capital needs.

Dynamic discounting gives buyers and suppliers flexibility

Dynamic discounting is about creating a flexible relationship between the finance departments of the two companies for when their financial interests align.

Specifically, it allows the buyer to generate better returns when they have a cash surplus. That could be seasonal – in retail, for instance.

But then it is just as much about giving suppliers the flexibility to take early payment for discounts when those suppliers need cash early: to boost their own working capital or to meet other financial targets – at the end of an accounting period, for example.

The supplier is not obliged to take the discount. But it’s put on the table when the buyer wants to offer it. And that again is why it is a CFO and treasury issue.

Determining if and when there is a cash pool to optimise is obviously not a procurement issue. But dynamic discounting is still an effective way for CFOs to support procurement managers develop stronger, more strategic and stable relationships with supplier organisations because it’s a form of financial collaboration that benefits both sides.

At some level, it makes the ongoing job of procurement easier because the buyer is now a more attractive business partner, providing a cost-effective way of accessing cash which is without risk and bypasses traditional financial intermediaries like banks or factoring companies.

So, in a low interest rate environment, and when cash is in surplus, the interests of treasury and procurement can coincide with massive benefits to both. These two circumstances create an opportunity for procurement and finance to work intimately together, where finance gets better returns on cash, and procurement gets an improved relationship with suppliers – especially smaller, innovative firms whose role in the supply chain may be critical to long-term competitiveness.

Dynamic discounting can be implemented easily

Dynamic discounting is attractive in principle but can be very hard to manage manually. Xelix has been built to overcome that challenge, allowing companies a straightforward solution that can be implemented rapidly and scaled up quickly. Xelix does not require any change to a company’s AP process, nor heavy IT setup.

So, it’s a light-touch technology option that can be up and running in a matter of days. This stands in stark contrast to other innovations that require costly changes to systems and infrastructure, such as supply chain finance or e-invoicing. Vendors of these solutions might offer dynamic discounting as part of an upsell, but only after a significant investment that might require lengthy IT development, rigorous supplier onboarding and the inclusion of financial intermediaries.

Crucially, Xelix’s method of dynamic discounting requires no change on the part of the supplier. Asking a large base of international suppliers to develop new processes or ways of working comes with the inherent challenge of overcoming apathy and general resistance. Xelix’s email-based system gets around this by enabling suppliers to partake in the early payment program without adopting any new ways of working.

Discounting is now a finance dynamic

So, early payment now sits squarely within the finance function. It is a tool to be used tactically by CFOs when cash is available, that delivers clear economic benefit through reduced costs and superior returns on excess cash. It also supports procurement managers as they attempt to develop stable, long-term relationships, by providing suppliers with control over when they get paid.

Using Xelix’s light-touch technology removes any need for complicated IT investment or time-consuming supplier onboarding. Get in touch below to see a demo of how it works.

Contact Us