Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How Supplier Financing Cut Procurement Costs 16 Percent
Transcript
- Lucas: So Luna, I came across a fascinating case from a mid-size manufacturer in the aerospace supply chain. They were running on standard net-60 payment terms, and the procurement team decided to offer suppliers early payment in exchange for a discount. Over two years, that move cut their direct material costs by 16 percent. Luna: Wait — paying suppliers early usually means you shell out cash faster. How does that save money? Lucas: Right, it sounds counterintuitive. But let's break it down. When a supplier quotes a price under net-60, they're effectively financing your purchase for 60 days. That financing cost gets baked into the price — sometimes as much as 2 to 3 percent. By offering to pay in 15 days instead, you can negotiate a discount equal to that embedded cost, or a portion of it. Luna: Okay, so you're paying less per unit. But what about your own cash position? Doesn't paying early strain your working capital? Lucas: That's where supply chain finance — or supplier financing — comes in. The buyer partners with a bank or a fintech platform. The bank pays the supplier early, say in 15 days, at a low interest rate. Then the buyer repays the bank at the original 60-day mark. So the buyer's cash flow doesn't change, but the supplier gets paid fast, and the buyer gets the discount. Luna: So the bank's money is cheaper than what the supplier would have to borrow on their own. Lucas: Exactly. The supplier typically pays higher interest rates on their own credit — if they can even get it. Through the buyer's program, they access the buyer's lower credit rating. That's why they're willing to take a discount on the invoice. The buyer captures the spread between the bank's rate and the supplier's usual cost of capital, and passes some back to the supplier in the form of faster payment. Luna: What does the split look like? How much does the buyer actually save? Lucas: In the aerospace manufacturer's case, they offered a 1.5 percent discount for payment within 10 days, instead of 60. The bank charged them about 0.5 percent for the early payment funding. So the net saving was 1 percent per invoice. Over two years, with about $160 million in direct material spend, that added up to a 16 percent reduction in total material costs — not all from this, but the supplier financing program was the main driver. Luna: That's substantial. And I imagine it also strengthened supplier relationships. Getting paid on time is huge for small suppliers. Lucas: Huge. They surveyed their suppliers and found that 85 percent said cash flow predictability improved significantly. And the number of late deliveries dropped by 40 percent. So there's an operational benefit too. Luna: Are there any downsides? I've heard stories of buyers using these programs to squeeze suppliers even harder. Lucas: That's the risk. If you set the discount too high or the payment window too tight, it becomes a tool for extracting margin rather than creating shared value. The smartest programs are designed with input from key suppliers. Also, you need to make sure the bank's rate doesn't go up — if interest rates spike, the savings evaporate. Luna: This feels like a strategy that works best when both sides are transparent. The buyer has to be willing to share some of the benefit. Lucas: Absolutely. In this case, the procurement team worked with their finance department to model the savings and then told suppliers exactly how the program worked. They even offered training sessions. That transparency built trust. Lucas: Now, this isn't just for billion-dollar companies. There are platforms like Taulia and PrimeRevenue that make it accessible for mid-market firms. You need a decent credit rating and a willingness to standardise terms across your supply base. Luna: What about the smaller suppliers that might not have the systems to handle early payment requests? Did that cause issues? Lucas: Great question. Some of their smaller suppliers didn't have automated invoicing. So the manufacturer integrated the platform with their ERP and let suppliers log in to a web portal to see approved invoices and choose early payment. It didn't require any fancy tech on the supplier's side. Luna: So it scaled. This is a really practical example of how procurement can directly impact the bottom line without slashing prices or squeezing margins. Lucas: And it's a strategy that aligns incentives. Suppliers get cash sooner, you get lower costs, and the bank earns a spread. If these conversations have moved your work forward in some small way, you know what — we keep this show ad-free because of listener support. If today was worth a coffee to you, that link is buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to keep these deep dives coming. Every bit helps. Lucas: Let's dig into one more aspect: how the program handles dynamic discounting versus static terms. The aerospace company started with a fixed 1.5 percent discount for 10-day payment, but they later offered sliding scales — bigger discount for faster payment, smaller discount for 20-day terms. That gave suppliers options. Luna: Did that increase participation? Lucas: By about 30 percent. Suppliers liked having choice. And the buyer's total cost reduction went up because more invoices were discounted. It's a win-win when you design flexibility in. Luna: I'm thinking about the long-term relationship angle. If you're a buyer and you start a program like this, do suppliers start to expect it? Could it become a disadvantage if you stop? Lucas: That's real. One risk is that suppliers build the early payment into their baseline. If you discontinue the program, they might raise prices to compensate. So it's better seen as a permanent initiative rather than a short-term tactic. And you have to manage the bank relationship carefully — if your credit rating dips, the bank's rate could go up, eating into savings. Luna: So it's not set-and-forget. It requires ongoing monitoring from both procurement and treasury. Lucas: Exactly. The procurement and treasury teams need to meet quarterly to review the cost-benefit. And if interest rates shift, they adjust the discount rates accordingly. The company we looked at now runs a quarterly review that includes top suppliers in the conversation. Luna: That's smart. It turns a transactional program into a collaborative tool. Lucas: And that collaboration can extend beyond payment terms. Once you have that touchpoint, you start talking about demand forecasting, inventory buffers, even product design. One supplier suggested a raw material substitution that saved another 3 percent. Luna: So the financing program became a gateway to broader innovation. Lucas: Right. And that's the real lesson: procurement is not just about getting the lowest price. It's about designing systems that create value for everyone in the chain. Luna: Alright, wrapping up — if someone wants to explore this for their own company, what's the first step? Lucas: Talk to your treasury department about your company's credit rating and cost of capital. Then look at your payment terms distribution — see how many suppliers are on net-30 or net-60. Pick a pilot category with a few strategic suppliers. Work with a finance partner like a bank or a platform. Start small, measure the savings, and then scale. Luna: Sounds like a blueprint. And one that can deliver real, measurable impact. Lucas: Exactly. So next time you're negotiating payment terms, remember that the timing of cash flow can be as powerful as the price itself.