Dynamic Discounting- It's the Suppliers!
As Dynamic Discounting continues to gain in popularity for the cash optimization benefits it delivers, knowing your suppliers is key to launching a successful program. No one who has evaluated the return-on-cash models that surround Dynamic Discounting disputes the enormous potential these programs offer. It almost seems to good to be true. And it may be if you jump into this program without knowing and understanding your supplier base.
What discount you offer, to whom, and when will dictate the success of your program to a great extent. What motivates one supplier to act may be completely unappealing to another. And when you make the offer matters as well. Offers to larger, more financially stable public company suppliers made at quarter-end or fiscal year-end may yield a higher acceptance rate and higher discount percentages than those made to the same suppliers at others points in the cycle.
The level of discount you offer should also depend on the profile of that supplier. Offers to smaller suppliers who have less than stellar credit and who pay relatively high factoring rates on their AR or asset based borrowings can be much more targeted and yield substantially higher discounts.
The point is, to fully leverage dynamic discounting in your organization and increase the likelihood that the returns on your short term cash investments will exceed your expectations, you need to understand your supplier base and build a strategy that will maximize results. While that may sound like a daunting task given the large number of suppliers many companies deal with, there are methods and models that can address this issue and put you on a path to big returns.
Contact ICG Consulting to learn more about Dynamic Discounting.