Emphatic support among buyers for early payment discounts

Will Green is news editor of Supply Management
3 March 2014

☛ Want the latest procurement and supply chain news delivered straight to your inbox? Sign up for the Supply Management Daily 

3 March 2014 | Will Green

Members of the Supply Management Jury have given a resounding majority verdict in favour of using early payment discounts as a tactic with suppliers.

In response to the question: "Is discounting from suppliers for early payment an appropriate tactic for buyers?" the Jury voted by 11 to one in support of the practice.

However, while early payment discounts were supported, warnings were sounded over the effect on SMEs and the ethics of squeezing suppliers.

Our online poll was less emphatic, with 72 per cent voting in favour of the practice.

Bob Lavery, procurement manager at the University of Leeds, said "yes", though he cautioned the whole cost had to be considered.

“You can fairly easily calculate the cost of borrowing the cash or loss of interest on money invested,” he said. “You are then left with a straightforward decision – will the savings made be more or less than the cost of the money?”

Chris Graves, head of procurement services at YPO, said: “This is all part of the negotiation but in the current period with interest rates at such a low rate, it isn’t likely to deliver significant discounts. My only caveat to this is that in some circumstances there may be socio-economic benefits from agreeing to shorter payment terms, such as when working with SMEs or voluntary organisations.”

Eunja Hwang, supplier expeditor at Howden, said: “I do not believe that it is ethically wrong in business. Early payment will help suppliers have better cash flow and the buying organisation can take advantage from that.

“There could be an issue raised for buyers working in SMEs who might have less capability than buyers in large organisations to use this tactic.”

Tony Morris, client procurement consultant at Integreon, was alone in voting ‘no’. “I believe buyers have a responsibility to ensure prompt or indeed early payment to enable the stability of that supplier,” he said. “Procurement should be working with finance departments to ensure prompt payment and working with suppliers to ensure cost elements are defined.”

Some said the practice should not be used to squeeze suppliers.

Neil Dixon, head of procurement and supplier management at LeasePlan UK, voted 'yes' but said: “It does become a problem when it results in either taking the discount but not paying promptly, or pushing costs down to the lowest possible level and then insisting on an unreasonable prompt payment discount.”

Calderbridge, Seascale
£52,518 - £64,233
London (Central), London (Greater)
£450 per day
Beaumont Select
CIPS Knowledge
Find out more with CIPS Knowledge:
  • best practice insights
  • guidance
  • tools and templates