The 2023 supply chain continues to experience the ripples of a changing economic landscape.
Businesses are implementing cautious and deliberate approaches to growth and spending as inflation persists. Conservative investing, coupled with unpredictable surges in demand, highlight the need for adaptive strategies to manage material shortages and extended lead times.
These strategies will prove essential for businesses who want to maintain excellent service for their customers–and supplier relationships play a crucial role in this.
When your suppliers are supportive, they are more likely to be lenient and empathetic when you require additional help to stay on schedule and within budget. They might also inform you about upcoming discounts and sales, all of which contribute to providing excellent service and safeguarding your profit margins, even when the market is unpredictable.
Arguably the number one way to maintain a positive standing in the eyes of your suppliers is to ensure your invoice payments are on time, every time. In fact, many suppliers incentivize consistent payments with dynamic discounting–a process you can leverage to your advantage with the help of AP automation.
In this blog, we’ll answer the following questions:
- What is dynamic discounting?
- How does dynamic discounting work?
- Can dynamic discounting be automated?
- How does dynamic discounting help your business stay agile in the face of change and uncertainty?
What is Dynamic Discounting?
Dynamic discounting is a financial arrangement where a buyer of goods or services receives a scaling discount from a supplier based on the number of days a payment is made in advance of the agreed-upon payment terms.
It goes a step further than traditional early payment discounts on standard payment cycles (like Net 30, 60 or 90) by offering greater flexibility in the supplier’s ability to offer a discount.
Let's say a supplier has a Net 30 payment period and offers a 5% discount if you remit payment 30 days before the due date. They also give a 2% discount if you pay 15 days before the due date. With dynamic discounting, you have the flexibility to pay between these timeframes and get a discount that's based on how many days early you pay.
For instance, if you pay 20 days before the due date, a dynamic discounting system would calculate a discount rate that's lower than the 30-day rate but higher than the 15-day rate. In this case, it might be a 4% discount for paying 20 days early.
It might seem counterintuitive that a supplier would want to offer more discount opportunities–but in reality, this is a mutually beneficial arrangement.
As a buyer, you get more chances to save and enjoy better payment flexibility. And for your suppliers, there's a greater likelihood that their days sales outstanding (DSO) will be reduced, meaning they have money in hand sooner to cover their own costs.
Think of it this way: Let's say you offer a percentage discount for payments made within either 15 or 30 days of the invoice due date. If a buyer misses the 30-day early payment deadline, their motivation to pay before the next discount deadline at 15 days decreases significantly.
However, with dynamic discounting, they would remain motivated to pay as early as they can to secure the highest possible discount.
Faster payments and shorter invoice lifecycles help businesses on both ends manage their cash flows more effectively, which helps them plan and budget for the future with greater accuracy.
How Does Dynamic Discounting Work?
Discount opportunities for early payments are offered at the supplier’s discretion and at a scale that they determine.
Without automation, the supplier would typically have to either provide a credit memo or cancel your current invoice and replace it with a new one when you opt to take advantage of these early payment discounts.
While dynamic discounting offers advantages for both parties involved, doing so manually can mean a lot of extra hassle for your supplier who has to:
- Validate how early the payment came in
- Calculate the discount accordingly
- Process additional paperwork to make sure your discount is captured in a way that allows their ledger to balance
The buyer's accounts payable team also faces challenges. They might struggle to close out purchase orders that still have funds remaining if the necessary paperwork isn't handled to account for the supplier's discount.
While there are clear advantages for both suppliers and buyers in this arrangement, many teams find that the practical challenges of implementing such a program manually aren’t feasible in their day-to-day operations.
Can Dynamic Discounting be Automated?
Thankfully, yes! The dynamic discounting process can be made much easier for buyers and suppliers alike when AP automation solutions with dynamic discounting capabilities are in place.
Best of all, industry-leading AP systems like DocuPhase simplify the process of configuring and implementing dynamic discounting on your behalf. Here’s how it works:
- First, a vendor adoption (VA) team will partner with you and your suppliers to establish who is willing to offer dynamic discounting opportunities.
- Then, they will help the team establish terms and payment scales that all parties agree with.
- Once terms are established, the VA team will implement them into the AP automation platform, and they will apply to all invoices submitted via the supplier’s online portal.
- Using an advanced algorithm, DocuPhase determines in real time the appropriate discount for the supplier and customer based on the selected date and terms previously decided on.
- The supplier agrees to the dynamic discount and can look forward to a payment that meets their schedule.
Then, when it comes time for payment remittance, AP automation aids the buyer in processing and paying invoices smoothly, aiming to minimize exceptions and ensure timely payments that qualify for discounts.
By automatically ingesting the data from the invoice as it’s submitted, validating it against your PO and/or material receipt, and automatically routing it to the necessary approvers, you can process, approve, and even submit virtual payments directly to your suppliers from a centralized platform.
While these discounts might appear minor when viewed individually, they can accumulate into substantial savings on a larger scale.
For instance, JetBlue, a customer of DocuPhase, managed to secure more than $3 million in savings by implementing a dynamic discounting program. These added savings can significantly benefit your business, especially during uncertain economic times.
How Does Dynamic Discounting Automation Preserve Business Agility?
Businesses can leverage dynamic discounting to remain agile and adaptive in the following ways:
- Mitigate demand fluctuations - By leveraging dynamic discounting, accountants can incentivize suppliers to adjust production schedules based on changing demand patterns. This can help ensure that the company can quickly adapt to shifts in demand, reducing the risk that you’ll be unable to serve your customers when they need you.
- Limit disruptions – Paying suppliers promptly strengthens your relationship with them. As a result, they tend to prioritize your orders because they know you'll pay them sooner. This approach helps maintain a reliable supply chain, even in challenging market situations.
- Reduce inventory holding costs – Reducing supplier disruptions also decreases the need to hoard inventory to avoid long lead times. This allows you to avoid storage expenses and inventory losses caused by items becoming obsolete or misplaced.
- Strengthen visibility – Shorter invoice cycles help you track cash flows more accurately, allowing you to improve strategic planning by observing payment patterns. Leading AP automation systems also let you set KPIs to monitor your discounting progress and find areas for long-term improvements.
By strengthening your supply chain's reliability and refining your forecasting efforts, you're taking crucial steps to navigate disruptions effectively and stay ahead of your competition. This paves the way for a resilient and successful business future.
In the intricate landscape of 2023's supply chain challenges, businesses must embrace strategies that bolster their resilience. The interplay of inflation, recession threats, and unpredictable demand surges necessitates strategic readiness.
Central to this preparedness are strong supplier relationships.
A supplier aligned with your prompt payment schedule can wield significant influence over your service quality, even in a volatile market. Timely payments, fueled by dynamic discounting and automated AP solutions, can drive this synergy.
As the supply chain strengthens, forecasting sharpens, enabling you to confidently navigate disruptions and lead the competition.
Adaptability, then, isn't merely an advantage; it's the essence of survival and prosperity.
Want to learn more best practices for adapting to future changes and challenges? Schedule a chat with an automation expert today!