Make payment terms part of your strategic sourcing negotiations

Including non-price variables in your strategic sourcing negotiations is important. Sure, we focus on price, but we need to keep in mind that multiple other factors will impact the overall value of your negotiation. 

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Wednesday, October 9, 2019

Including non-price variables in your strategic sourcing negotiations is important. Sure, we focus on price, but we need to keep in mind that multiple other factors will impact the overall value of your negotiation. 

The most obvious non-price variable is payment terms. After all, where else can you find an effective 37% interest rate on your money? By negotiating (and taking advantage) of a Net 30 14-day 2% payment discount, you can do just that. Good luck finding a 37% return elsewhere

If you’re looking to better incorporate payment terms into your negotiations, follow these five simple steps:

  • Ask
  • Make it part of the bid
  • Understand where you sit
  • Get help from others
  • Be flexible

  1. Ask – Suppliers are keen to win your business. Otherwise, they wouldn’t be participating in your event. Frequently, a seller will have a firm cellar price but may have the ability to make concessions in other areas. This is particularly true if your seller is a larger company with access to a lower WACC (i.e. financing). That said, be careful of just extending payment times as the math can sometimes be underwhelming when weighed against relationship factors.
  2. Make it part of the bid – If you’re not incorporating non-price variables such as payment terms, it’s time to start doing so especially for larger, higher-value bids. Doing so through parameters is not complicated and your Scanmarket account manager or consultant can show you how. In addition to making a more comprehensive bid, it will also allow you to incorporate the information for future reference and improve the audit trail going forward.
  3. Understand where you sit – The most arduous part of better management of your payment terms (and finding new opportunities) is determining exactly where you stand today. While you could conceivably do this offline via Excel or similar, it would take so long that you wouldn’t be able to accomplish anything else for the rest of the year. Instead, use your Scanmarket Contract Management or Spend Analysis system to help you find the data you need. These will also help you keep better tabs on new and existing terms going forward.
  4. Get help from others – This is where Finance should really be your friend. By their very name, they should understand the implications of changes in payment terms. They will also help you with determining the relative cost-of-capital impacts. Most importantly, they can be your best ally in transferring any payment terms benefits to your all-important savings goal metric. If you want to find a group excited about a 37% return, these are the folks.
  5. Be flexible – Above all, remember that you and the winning supplier will be entering a relationship once the negotiation is over. Declaring by fiat a change in your payment terms may provide you with a short boost but harm the overall relationship. Instead, work WITH the supplier to explore what would be best for all parties. You want good suppliers and good supplier relationships over the long haul. 

You’re tasked with finding savings every day. Make sure that you’re looking in all the right places, not just price, by exploring your opportunities with payment terms. You might be surprised by all the “good stuff” you find there. 

For more information on these approaches or to learn more about how Scanmarket can help you achieve your business objectives, please visit us at www.scanmarket.com or contact your Scanmarket account manager. 

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