Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How a Buyer Cut Costs by Renegotiating Payment Terms
Transcript
- Lucas: So we've spent a lot of episodes talking about cutting costs through smarter sourcing, better contracts, even AI. But there's one lever that's sitting right on every purchase order, and most procurement teams barely touch it. Luna: You're talking about payment terms, right? The old net-30 vs. net-60 debate. Lucas: Exactly. And today I want to walk through how a mid-sized manufacturer in the Midwest — let's call them Acme Manufacturing, not their real name — cut six percent off their annual procurement spend just by renegotiating payment terms with their top suppliers. Luna: Six percent is substantial. How'd they pull that off without wrecking their supplier relationships? Lucas: Well, the first thing they did was segment their supplier base. They had about 200 active suppliers, but the top 20 accounted for 80 percent of spend. They decided to focus exclusively on those big guys. Luna: That makes sense — you don't want to squeeze a small machine shop that's barely making margins. Lucas: Right. So they went after the larger suppliers, the ones with more financial flexibility. For those, they proposed moving from net-30 to net-60. And they didn't just ask for it — they came with data. Luna: What kind of data? Like, 'we're a big customer, you should do this for us'? Lucas: More than that. They showed each supplier their total annual spend, their on-time payment history, and the volume of business they were putting through. They positioned it as a partnership move: 'We're increasing our commitment to you, and in turn we'd like to align payment terms with our cash cycle.' Luna: So it's about framing. It's not 'we want to pay you later' — it's 'we're working together on cash flow.' Lucas: Exactly. And they sweetened the deal by offering early-payment discounts on a subset of invoices. So if a supplier agreed to net-60, they'd also offer a 2 percent discount for payment within 10 days on certain orders. That way, the supplier had a choice: get paid faster at a slight discount, or wait the full 60 days. Luna: That's clever. It gives the supplier control, and the buyer gets flexibility. But not every supplier went for it, right? Lucas: No, of course not. About a third of the top 20 pushed back. Some said their own cash flow couldn't handle 60 days. Others just didn't want to change their terms. So the buyer had to decide: do we push harder, or do we compromise? Luna: What did they do with the ones who said no? Lucas: They didn't force it. They kept those suppliers at net-30, but they prioritized them for the early-payment discounts. So the supplier still gets a benefit, and the buyer still gets some cash-flow advantage, just on a different timeline. Luna: So they used the discounts as a carrot for the reluctant ones. Lucas: Exactly. And for the ones who agreed to net-60, they didn't just extend terms across the board. They only did it on non-critical categories — raw materials that they had safety stock for, or components with longer lead times. They didn't touch anything where a supply disruption would hurt production. Luna: That's smart. Because if you're paying later for something you need tomorrow, you're creating risk. Lucas: Right. And the working-capital math is what made it work. By extending payment terms from 30 to 60 days on, say, 40 percent of their spend, they freed up roughly 30 days of cash on that portion. That's millions in working capital they could use elsewhere — or simply keep in the bank earning interest. Luna: So the six percent savings—is that from the discounts they took, or from the interest on the cash, or what? Lucas: It's a combination. A big chunk came from the early-payment discounts they took on the suppliers who offered them. Because remember, they offered 2 percent for paying in 10 days. On some invoices, that 2 percent is more than the cost of borrowing that money for 20 days. Luna: Ah, so they're basically arbitraging the discount rate against their own cost of capital. Lucas: Exactly. If their cost of capital is, say, 6 percent annually, and they're getting a 2 percent discount for paying 20 days early — that's an annualized return of over 36 percent. It's a no-brainer. Luna: Wow. So they're actually making money by paying early in some cases, and by paying late in others. Lucas: That's the art of it. They're using payment terms as a strategic tool, not just a default setting. And they didn't do this all at once. They phased it in over a year, supplier by supplier, invoice by invoice. Luna: So what was the biggest challenge? I'd imagine getting the finance team on board is one thing, but the suppliers' reactions can be unpredictable. Lucas: The biggest challenge was actually internal. They had to convince their own CFO that extending payment terms wasn't going to hurt supplier relationships or signal financial distress. They had to show that they were doing it deliberately, not because they were cash-strapped. Luna: That's a good point. If a supplier thinks you're paying late because you're in trouble, they might start raising prices or demanding upfront payment. Lucas: Exactly. So they communicated the strategy clearly. They told their top suppliers, 'We're looking to optimize our working capital, and we want to do it in a way that's mutually beneficial.' And they backed it up with data on their own financial health. Luna: So this isn't just about picking up the phone and asking for longer terms. It's a whole process. Lucas: It is. And it's a process that can be replicated. But there's one more piece — they used a supply-chain finance platform to facilitate some of the early payments. That way, suppliers who wanted to get paid faster could do so at a small discount, but the buyer didn't have to actually part with the cash earlier. Luna: Ah, so the platform pays the supplier early, and then the buyer settles with the platform later. It's like a third-party intermediary. Lucas: Right. That's where the platform earns its fee, and it's often less than the discount the buyer would have to give directly. So the buyer gets the benefit of early payment without the cash outflow. Luna: That's a win win win, as they say. Lucas: It is. And the key takeaway here is that payment terms are a real lever in procurement, not just a back-office detail. By segmenting suppliers, using data, and offering alternatives, this company turned a standard operating procedure into a six percent cost reduction. Luna: And it's something any procurement team could look at, right? You don't need to be a giant corporation. Lucas: Absolutely. Even a small team can start with their top suppliers and have that conversation. It's about being creative and collaborative, not just demanding changes. Luna: You know, this reminds me of something. We get so many emails from listeners who say these episodes have given them actionable ideas they can bring to their own work. And that's exactly why we do this show. Lucas: Yeah, and if you've found value in these conversations, and you want to keep them coming ad-free, you can support the show by buying us a coffee over at buy me a coffee dot com slash fexingo. It's a small gesture that goes a long way in keeping this podcast going. Luna: And we don't have a paywall or ads, so it's really just about voluntary support from folks who enjoy the content. Lucas: Right. So, back to payment terms. The last piece of this story is about the suppliers who agreed to the longer terms. The buyer didn't just leave it at that — they worked with those suppliers to find other efficiencies, like joint forecasting or shared logistics. Luna: So it becomes a deeper partnership, not just a financial transaction. Lucas: Exactly. And that's the real lesson: payment terms are a door opener. Once you start talking about cash flow and working capital, you can explore other ways to create value together. It's not just about paying later — it's about finding a rhythm that works for both sides. Luna: That's a great way to end. I think we've given our listeners a lot to chew on. Lucas: Agreed. Next time you're reviewing a purchase order, take a second look at the payment terms. You might just find your next cost saving.