Latest / The Buyer's Side with Fexingo: Procurement, Sourcing, and B2B Purchasing Decisions / How a Buyer Cut Costs with Supplier Payment Terms
Transcript
- Lucas: You know, there's a quiet lever in procurement that rarely gets the spotlight, but it can move millions on a balance sheet. I'm talking about payment terms. And not just the 'net 30' stamp on the bottom of an invoice — the actual negotiation of when money changes hands. Luna: Right, because most buyers treat payment terms as a given, something the supplier sets. But there's a whole game there. Lucas: Exactly. And today I want to walk through a case where a mid-sized manufacturer — let's call them Meridian Components — took a hard look at their payment terms with a critical machined-parts supplier. They were on standard net 30, and their CFO was pushing for net 60 to extend cash runway. But the procurement lead, a woman named Dana, realized she could actually use payment terms as a bargaining chip rather than just a demand. Luna: So she wasn't just asking for longer terms — she was offering something in return. What did she give up? Lucas: She offered an early-payment discount. Specifically, a 2 percent discount if Meridian paid within 10 days, otherwise the full amount in 30. That's the classic 2 slash 10 net 30. But here's the twist: she didn't just unilaterally impose it. She sat down with the supplier's CFO and modeled what that discount was actually worth to them. Luna: Because to the supplier, getting paid in 10 days instead of 30 is worth something. They can put that cash to work. Lucas: Right. And Dana knew that the supplier's cost of capital was around 8 percent. If they get paid 20 days earlier, they're effectively saving that interest on the cash for those 20 days. So a 2 percent discount is actually generous — it's like an annualized return of nearly 37 percent on that 20-day acceleration. The supplier jumped at it. Luna: Wait, so she offered the discount, and the supplier accepted. But how does that cut costs for Meridian? They're giving up 2 percent of the invoice value. Lucas: That's the key insight. She didn't just offer the discount in exchange for nothing. She tied it to a modest price reduction on the unit cost. So the supplier's net margin stayed roughly neutral — they got paid faster, so they could afford to shave a little off the price. Meridian's overall cost per part dropped by 1.8 percent, even accounting for the early-payment discount they took on every invoice. Luna: So it's a win-win. The supplier improves their cash flow, and Meridian reduces their cost of goods sold. But how did she get to that 1.8 percent number? I imagine there's some calculation behind it. Lucas: Absolutely. She built a simple spreadsheet model. She took the annual spend with that supplier — around $4.8 million — and calculated the impact. With the 2 percent discount on, say, 80 percent of invoices that got paid early, that's about $77,000 a year in discounts foregone. But the unit price reduction, which was about 3 percent on the total spend, saved them $144,000. Net savings: about $67,000, or 1.4 percent of spend. But she also factored in the administrative cost of managing the early payments — maybe $10,000 a year in extra AP workload. So net around $57,000, which is still a solid win. Luna: So the discount isn't just a cost — it's an investment that buys you a price cut. But I'm guessing not every supplier is willing to play that game. What if they don't need the cash? Lucas: That's where Dana's second move came in. For suppliers with strong balance sheets — ones that didn't need early payment — she shifted the conversation to volume. She offered a 5 percent increase in order volume in exchange for a 2 percent price cut. That way the supplier's revenue grows, and their per-unit costs drop because of economies of scale. That worked with a couple of smaller suppliers who were eager for more business. Luna: So it's not just about payment terms — it's about understanding what the supplier values and crafting a trade. That's the real skill. Lucas: Exactly. And that's the thing about procurement — it's not just squeezing suppliers; it's finding the currency that matters to them. For some, it's cash flow. For others, it's volume. For others, it might be longer-term commitments or even help with their own supply chain. Luna: I love that. And it reminds me of something from our own experience — you know, we run this podcast ad-free, and that's only possible because of listeners who support us. It's like they're investing in what we do, and that allows us to keep having these conversations. If these episodes have helped you think about your own work or given you a new angle, consider supporting us at buy me a coffee dot com slash fexingo. Every bit helps keep the show going. Lucas: Yeah, it's a small way to give back, and we're grateful for it. But back to Dana — she also made sure to benchmark her terms against industry standards. She found that while net 30 was the norm in her industry, many larger competitors were already on net 60 or even net 90 with their suppliers. That gave her leverage in internal conversations with finance — she could show that extending terms wasn't just a cash grab, but a competitive move. Luna: So she had data to back up the negotiation internally. That's important, because procurement often has to justify changes to finance. Lucas: Right, and she also had to be careful about the risks. Pushing payment terms too far can backfire. If suppliers start feeling squeezed, they might raise prices, or worse, deprioritize your orders when capacity is tight. Dana saw this happen with a competitor who forced net 90 on a key supplier — that supplier quietly started routing their best engineers to other customers. Luna: So there's a hidden cost to aggressive terms. It's not just about the invoice — it's about the relationship and the service level. Lucas: Exactly. Dana's approach was more collaborative. She even offered to help the supplier get financing through a supply chain finance program, where a third party advances the payment at a low rate. That gave the supplier immediate cash without Meridian having to pay early. In exchange, the supplier gave a 1.5 percent price reduction. That's a different kind of win-win — it doesn't cost Meridian anything directly, and the supplier gets liquidity. Luna: That's clever. So she's using financial tools to align incentives. I bet that impressed the CFO. Lucas: It did. By the end of the quarter, Meridian's days payable outstanding — or DPO — had increased from 32 to 41 days, which improved their cash conversion cycle. And their overall procurement savings hit 2.3 percent across the suppliers they renegotiated with. That's a direct contribution to the bottom line. Luna: And it's not just about the numbers. She probably strengthened the relationships too, because she was offering value, not just taking. Lucas: Absolutely. One supplier told her it was the first time a buyer had sat down and understood their financial constraints. That kind of goodwill pays off in the long run — better pricing, faster delivery, more flexibility during shortages. Luna: So what's the takeaway for our listeners? If they want to try this, where should they start? Lucas: Start with a list of your top 20 suppliers by spend. For each one, ask two questions: First, what are their current payment terms? Second, what's their cost of capital or their cash flow situation? You can often infer that from their size, industry, and whether they're public or private. Then, pick one or two suppliers where you think there's an opportunity and open a conversation. Use the data we talked about — model the discount rate that's mutually beneficial. Luna: And if the supplier is hesitant, you can always propose a supply chain finance program. That's a softer approach that doesn't require you to change your own payment timing. Lucas: Exactly. And don't forget to benchmark. Look at what your competitors are doing, and what's typical in your industry. If you're on net 30 and everyone else is on net 60, you have room to negotiate. But if you're already at net 90, maybe you should focus on other levers. Luna: And one more thing — make sure you have the data to back it up. Dana's success came from her spreadsheet model and her ability to articulate the win-win. That's what convinced both the supplier and her own finance team. Lucas: Right. Payment terms might not be the flashiest topic, but it's a real, measurable way to improve both cash flow and cost position. And it's a great example of how procurement can be a strategic partner, not just a cost center. Luna: I think we've given our listeners a lot to chew on. And if they want to dig deeper, we'll have more episodes on similar topics. Lucas: Yeah, and remember, the next time you see 'net 30' on an invoice, think about what that actually means — and what it could mean if you negotiated it differently. There's a lot of hidden value in those terms. Luna: Well said. And if you have your own stories of renegotiating payment terms, we'd love to hear them. Reach out to us — we're always looking for real-world examples. Lucas: Until next time, keep finding those win-wins.