Supply Chain Management Review

Nice post, Robert. One thing that I think would be helpful to your readers is to indicate how you've determined the interest rate to use. Also, when your procurement teams have reported savings from payment terms, what type of education did you have to provide to senior management on this matter and did you ever have challenges getting management to buy in to the legitimacy of those savings?

Good question about the interest rate. In general, you should check with your company's Finance department and get their advice. They'll often have a clear view on the appropriate rate to use for this purpose. Getting senior management's buy-in to the idea that improving payment terms offers value is usually not a big challenge. If needed, you can walk them through an example, or show them the chart from the Payment Terms - III posting, to get the point across. Partnering with the Finance dept on payment terms is also a good idea - they are natural partners on this topic, and can help verify the procurement department's "value" calculations.

I am struggling with this being a one-time benefit or an ongoing benefit. For example, If the invoice date is Jan 1, Feb 1, Mar 1, etc, then your payment with Net 10 would be Jan 10, Feb 10, Mar 10, etc. and with net 30 it would be Jan 30, Feb 30 (for example), Mar 30, etc. In either case you are paying every 30 days so wouldn't the benefit of net 30 only be a one-time benefit in month 1? Thanks.

Good question. In short, it depends on which benefit calculation you are focused on, and the baseline for comparison. If you are focused on the improvement in cash balances (from paying later), that is a one-time benefit. Some companies prefer to look at the "interest earnings" value of the one-time cash improvement. By its very nature, that is a recurring benefit, as long as you continue doing business with that supplier, and as long as there are in fact interest earnings on the "extra" cash you have on hand (as we have seen recently, short term interest rates can change dramatically on short notice). That's one reason why the table in the post is based on each $100 of invoices. The baseline is important as well. After a payment terms program matures, there may be little "year-over-year" change. And, most internal reporting tends to focus on the change compared to prior periods. Hope this helps.