Leaving A No-Risk 36 Percent Return On The Table: Supply Chain Finance Opportunities Managing Payables Discounts

Abstract

Supply chain management has traditionally emphasized managing the physical flow of parts and finished goods. The next natural evolutionary step is developing the management of supply chain finance across multiple trading partners. One of these opportunities requires investigation of managing payment discounts. Traditionally, suppliers offer a discount to buyers to encourage earlier payment. Terms such as 2/10 n/30 allow for a 2% discount if the entire purchase is paid in full within the 10-day discount period instead of the customary 30 days. This 2% payment reduction translates into the equivalent of an annual return of 36%, resulting in the traditional rule of thumb to take the discount whenever possible. For a variety of reasons, only a small percentage of buyers actually are capturing these high returns. There is a disconnect between trading partners for using discounts for managing working capital across the supply. This paper explores the beneficial impact of participating in early payment discount programs, potential reasons for failing to capture discounts and possible solutions and offers research questions to guide future research to aid in improving this supply chain finance opportunity.