Рет қаралды 1,026
Follow me at: / sime.curkovic . $70K per year & $100K+ by 30! Visit: simecurkovic.com
I just created a website & it gives you access to hundreds of my blogs, job postings, & hours of lecture videos. Just let me know if you want some material that requires a membership & I will send it to you free of charge.
Read: Do you know what this means? 2/10 net 30 (now employers want you to be Finaciers!!??) The good news is that they will pay more for more strategic skills...
A Purchase Order is a contract between a buyer and supplier. Over half of our students get their first full-time jobs in procurement/purchasing/sourcing in a buyer type of role. One of those job responsibilities will be to negotiate payment terms upon which you pay a supplier. When you pay for a product or service in your own personal life, you typically pay for it upon receipt or delivery of the good/service. However, in business-to-business transactions, the supplier usually does not get paid right away. Usually, the buyer will receive the goods/parts/material first, and then the buyer will pay for it later, sometimes very later. Buying organizations are often cash strapped, or simply put, they are cheap and greedy. Buyers will try to negotiate not paying for something as long as 30, 60, 90, 120 days after they actually get the stuff. Suppliers are not thrilled with this, but if you trust the buyer and know that you will eventually get paid, why not? Usually, large buying organizations have this kind of leverage over smaller suppliers. So, what is the current standard protocol for payment terms with buyers and suppliers? See below.
• 2/10 net 30
- 2% discount if paid within 10 days, full payment required within 30 days
So, if you buy $100 worth of parts from a supplier, you have to pay them at the latest, $100 30 days after you get the parts. However, if you pay them within ten days of getting the parts, you only pay $98. Here is the thinking part of this reading assignment. I think there are a lot of VP’s of SCM and VP’s of Finance that are not talking to each other very much. My impression is that most companies are obsessed with negotiating payment terms with net 30, 60, 90, and 120 days. This makes sense to me if a company is cash strapped, but I do not think most are. It also makes sense if you are broke and would have to borrow from a bank to pay the supplier (and if the cost of borrowing is really high). So, wait as long as possible to pay the supplier with our own cash (and hopefully you can make enough money in 30-120 days to pay your suppliers). If you cannot, then you have major cash flow issues and your margins are probably too tight to keep you in business. In which case, the bank might not even loan you any money.
I think most companies have some cash on the sidelines (The Great Recession of 2008) and why would you sit on that cash for 30, 60, 90, and 120 days? Why not pay your suppliers early and make cash (in the form of discounts - a dollar saved is the same as adding one dollar of pre-tax profit to your company’s bottom line). You might argue that keeping the money in the bank and collecting interest on it makes you more than the price discount that the supplier is willing to give you for early payment. However, here is my point - have you seen how low interest rates are and how low the cost of borrowing is in America? They are at record lows! You can borrow money to buy a house and only pay 2-3% in interest today. So, what is the strategic SCM opportunity here? How about this:
• 4/10 net 30
- 4% discount if paid within 10 days, payment required within 30 days
Let’s say you could actually negotiate these payment terms with a supplier, which I think they would go for if they could get their money sooner, especially if you are a buyer that does not pay them until 30, 60, 90, or 120 days out. As a buyer, even if you did not have the cash to pay them within 10 days, couldn’t you even borrow money from a bank to pay early? You still come out ahead because your cost of borrowing from the bank (1-3%) is less than the discount given to you by the supplier (4%). I also bet you there a lot of banks out there that would do all of this for you (all you have to do is sit back and enjoy the cost savings, and look like a superstar to your boss).
SCM is a very cross-functional discipline. Effective SCM requires working with your suppliers, their suppliers, your customers, their customers, and internally with engineering, sales/marketing, and even finance. For the first time in American history, interest rates and the cost of borrowing is at record lows, combined with money actually out there in the system to be borrowed. I personally feel corporate America (on the procurement side) is leaving money on the table with its antiquated payment terms with suppliers.