Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How One Procurement Team Slashed Costs with Dynamic Discounting
Transcript
- Lucas: So Luna, I've been digging into a cost-saving tactic that feels almost counterintuitive at first, because it involves paying suppliers faster, not slower. It's called dynamic discounting, and one mid-sized manufacturer I've been following used it to shave 14 percent off their procurement costs over eight months. Luna: Wait, paying suppliers faster saves money? That sounds backwards. Usually the playbook is to stretch payment terms out. Lucas: Right, that's the classic approach—push terms from 30 to 60 or 90 days. But dynamic discounting flips it. You offer to settle an invoice early, say ten days after receipt instead of 30, and in exchange the supplier gives you a discount. The discount scales with how early you pay. The earlier the payment, the bigger the discount. Luna: So the supplier gets cash faster, and you get a discount. But where's the cost saving coming from? Isn't that just a trade-off? Lucas: The saving comes from the size of the discount versus what you could earn on that cash elsewhere. For this manufacturer, the discounts they captured were effectively an annualized return well above what their treasury was getting on short-term investments. So they treated it like an investment decision—if the discount yields more than their cost of capital, they take it. Luna: Got it. So it's about optimizing the cash you have. But how do you decide which invoices to discount and when? Is it just pick the biggest ones? Lucas: That's the thing—it's not random. They built a simple decision matrix. For each invoice, they'd look at the discount offered, the number of days early they'd pay, and their own cost of capital. Then they'd calculate the effective annualized rate. If that rate beat their hurdle rate, they paid early. If not, they waited. Luna: That sounds like a pretty disciplined process. Did they use software for this, or was it all in spreadsheets? Lucas: They actually started in spreadsheets, but after about three months they moved to a supply chain finance platform. The platform automated the calculations and let suppliers offer discounts dynamically. It made the whole thing scalable. Luna: And the 14 percent saving—was that across the board, or concentrated in certain categories? Lucas: Mostly in components and raw materials, where invoices were large and frequent. They saw less impact in services, where payment terms are often shorter anyway. But the big win was in their top 20 suppliers, who accounted for about 80 percent of their spend. Luna: Before we dig deeper into the numbers, I want to mention something that's been on my mind. We keep this show free and ad-free, which is a choice we've made because we believe the conversations should stand on their own value. If you've found these episodes useful, you can support us at buy me a coffee dot com slash fexingo. It's a small way to keep this going. Lucas: Yeah, that's a good reminder. We don't have sponsors, and that's intentional. The link is buy me a coffee dot com slash fexingo, if you ever feel like supporting. But let's get back to the dynamic discounting story. Luna: So walk me through an actual example. How did a specific invoice play out? Lucas: Sure. One supplier sent a €500,000 invoice for a batch of machined parts, with standard terms of 30 days. The buyer's platform offered the supplier the option to get paid in 10 days for a 2 percent discount. The supplier took it. So the buyer paid €490,000 ten days later, saving €10,000 on that single invoice. Luna: €10,000 on one invoice. That's real money. But what's the annualized return on that? Because 2 percent for 20 days early sounds small. Lucas: If you annualize it, it's about 36 percent. That's huge. The buyer's cost of capital was around 6 percent, so they were earning a spread of 30 points. Obviously you can't get that on every invoice, but when you can, it's a no-brainer. Luna: That's a massive return. But wait—how does the supplier benefit? They're giving up 2 percent. Is that worth it for them? Lucas: For the supplier, it's about cash flow. They might have payroll coming due or need to buy materials. If their cost of capital is higher than 36 percent annualized—which it often is, especially for smaller suppliers—then taking a 2 percent discount is cheaper than borrowing. So it's a win-win. Luna: So dynamic discounting is essentially a liquidity tool for suppliers and an investment for buyers. But do all suppliers want to do this? I imagine some might see it as a red flag. Lucas: That's a real concern. If you push it too hard, suppliers might think you're in financial trouble or that you're trying to squeeze them. The key is transparency. You frame it as an option, not a demand. And you make the discount rates reasonable—not predatory. Luna: So it's about trust. How did this manufacturer avoid souring relationships? Lucas: They set clear guidelines. They only offered dynamic discounting to suppliers who had a good track record and who were open to it. They also made sure the discounts were capped at a level that still left the supplier better off than if they'd borrowed elsewhere. And they communicated it as a cash flow benefit, not a cost-cutting demand. Luna: Interesting. So it's not just about the math—it's about the relationship. What about the supplier that doesn't want to play? Did they lose any? Lucas: A few smaller ones declined at first, mostly because they didn't have the cash flow modelling to see the benefit. But after a couple of quarters, some came back when they realized it was a genuine option. The manufacturer never made it a condition of doing business. Luna: That's smart. So what was the 14 percent saving actually composed of? Was it all discounts, or did the platform itself help in other ways? Lucas: The bulk was discounts—probably 11 or 12 percent of procurement costs. But there were secondary benefits: fewer late payment penalties, less time spent chasing invoices, and better forecasting for the treasury team. So the platform helped streamline the whole accounts payable process. Luna: So what's the one thing a procurement manager should take away from this? Lucas: Start with your top ten suppliers. Look at your current payment terms and ask, if we paid 15 days earlier, what discount could we negotiate? Even a 1 percent discount on a million-euro invoice is ten thousand euros. And with a platform, it scales. Luna: And for the finance side—is this something the CFO would typically support? Lucas: Once you frame it as a return on cash, absolutely. CFOs love a 36 percent annualized return on working capital. It's just a matter of getting procurement and treasury to talk to each other, which is often the hardest part. Luna: So this isn't just a procurement tactic—it's a strategic finance move. Lucas: Exactly. It's a bridge between the two functions. And when it works, it's a win for everyone: the buyer saves money, the supplier gets liquidity, and the relationship actually gets stronger because you're helping them manage their cash flow. Luna: We've talked a lot about the benefits. What are the risks? I'm sure there are some. Lucas: The biggest risk is overcommitting your cash. If you pay everyone early, you might run low on liquidity yourself. So you have to set a budget for how much you're willing to accelerate. Also, if your supplier is in financial trouble, early payment could mask that, and you might not spot the risk early enough. Luna: Yeah, you don't want to prop up a failing supplier. So how did they manage that? Lucas: They kept the program to suppliers who passed a basic financial health check. And they monitored payment patterns—if a supplier suddenly started taking early payments on every invoice, that raised a flag, and they'd have a conversation. Luna: That's a good point. It's not just about the discount; it's about understanding your supplier base. So what's next for dynamic discounting? Is it becoming more common? Lucas: It's definitely gaining traction, especially as platforms make it easier. And with interest rates where they are in 2026, the return on early payment discounts often beats what you'd get in a money market fund. So it's an attractive use of cash. Luna: So if someone wanted to start this, what's the first step? Lucas: Talk to your treasury team. Get a sense of your cost of capital and your cash position. Then pick two or three suppliers you trust and have a conversation about what a discount for early payment might look like. You don't need a platform to start; you can do it with a simple email. Luna: That sounds doable. And it's a much more collaborative approach than just squeezing suppliers on price. Lucas: Absolutely. It's a classic win-win when done right. And it's a great example of how procurement can create value beyond just cutting costs. Luna: I'm curious—did the 14 percent saving include any other initiatives, or was it purely from dynamic discounting? Lucas: They had some other minor wins, like renegotiating a couple of contracts, but the bulk was dynamic discounting. The company was pretty focused on making it work, and it paid off. Luna: So it's a real strategy, not just a one-off. That's refreshing. Lucas: It is. And it shows that sometimes the most effective cost-cutting isn't about reducing what you spend, but about changing when you spend it. Luna: That's a nice way to put it. So, if someone wants to learn more, what would you recommend? Lucas: Look into supply chain finance platforms—there are several good ones. And talk to your CFO about the concept of working capital optimization. It's a conversation that can only help your career.