Keywords: dynamic discounting, procure to pay, purchase to pay, P2P, Supply Chain Digital, supply chains

Buyers and suppliers reduce risks through dynamic discounting

Matthew Garrow-Fisher | News | 4 May 2012

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If buyers and suppliers work together through dynamic discounting, they could significantly reduce risk as well as costs, it has been suggested.

Accounts payable departments can approve with their suppliers for a discount depending on their working capital needs, in exchange for earlier payment. For firms, they benefit from better return on investment through the discount, while suppliers get quick access to capital through early payment.

Writing for Supply Chain Digital, guest contributor Sundar Kamakshisundaram supported this practice, particularly when supply chains are facing constant strains from different directions, some of which are unforeseeable.

He suggested that buyers should work with suppliers by offering their good credit rating to help suppliers borrow at lower rates than they could achieve on their own.

"The result is a healthier and more productive relationship and supply chain," he claimed, adding that those buyers with the capital to pay early should propose dynamic discounting as well to benefit both parties.

"By joining together to optimise working capital and lower overall costs," Mr Kamakshisundaram remarked, "buyers and suppliers can dramatically reduce risk and create the strong relationships that will not only protect themselves in the short term, but also give both sides greater flexibility in pursuing opportunities in the long term."

As well as dynamic discounting and other invoice financing methods, preferred suppliers could also be required to review their performance more often, particularly during the current global economic climate where credit is restricted.

Mr Kamakshisundaram also suggested that supplier management processes should be automated, which will further boost their reliability for buyers, as well as make their systems more visible and control risk more effectively.

Highlighting the benefits of dynamic discounting could remain a challenge, however. Last month, a survey by Graydon UK and the Forum of Private Business revealed that just one-quarter of businesses see invoice discounting as a solution to the problem they face with late payments.