Business & Technology Nexus

Dave Stephens on technology and business trends

Top 5 Margin Transfer Tricks

with one comment

Last post, I asserted having good supplier relations can be great for business. I didn’t back it up with any hard facts – and I await your challenges.

For fun, I thought I would follow that post by doing a “Top 5” list of some of the margin transfer tricks I’ve seen customers use on their suspecting but often powerless supply base.

Trick #5: You do the manual data entry

At Oracle, I advocated moving to the “digital age” to countless customers by turning off the phone and fax, and marking snail mail “return to sender.” This increases a buying organization’s efficiency, but often just pushes the work to its supply base. Several major corporations now force their supply base to type in Invoices online. And while there is some time savings, most of the administrative costs have simply been transferred from buyer to seller. Still, there is a silver lining here – exposing these costs to the supply base creates additional incentives for e-enabling their transaction delivery systems.

Trick #4: Drawn out payment terms

The bigger the buyer, the longer the amount of time smaller suppliers must wait for payment. What started as an industry-standard Net30 has become Net45, Net60, and even Net90 for some companies. The additional cash flow generated can be invested wisely by big buying organizations, generating millions annually. Of course, that money is stripped from a hungry supply base.

Trick #3: The Big Red “Pay Me Now” Button

A derivative of #4, in this scenario buyers offer suppliers money whenever they’d like, but discount the payment by a formula based on the prime rate and the number of days before the agreed-to payment date has arrived. Suppliers desperate for cash have to give up on receiving the formerly agreed-to pricing and take what they can get to get it early.

Trick #2: Consigned inventory / pay-on-use

Here, buyers refuse to accept ownership of the goods they’ve “bought” until they are needed. A zero inventory concept, this pushes all the risk of soft demand to suppliers. Should production targets decrease rapidly the buying organizations inventory & variable production costs drop just as fast. And the supplier is left holding the bag.

Some buying organizations have experimented with variations on this concept, modifying the point at which ownership is transferred. Some have gone from Pay On Receipt, to Pay On Use, to Pay On Customer Shipment. With SOX concerns here in the US though, Pay On Use seems to be falling out of favor.

Trick #1: Reverse Auction “rabbits”

Plenty of buying organizations introduce false sources of supply to reverse auction events. These “rabbits” are Kmart blue light specials, sure to have a very, very low price. But because the buying organization would never consider using the firm, the pricing pressure they generate on the “real” suppliers is unethical.

I’m sure I missed quite a few. As always, I’d love to hear your stories.


Written by Dave Stephens

04/3/06 10:39 AM at 10:39 am

Posted in Opinion

One Response

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  1. Trick #1 is new to me.

    However, interstingly, manufacturer screws his supplier and the retailer screws the manufacturer. And the web is screwing WMT. EDLP? Sorry, I use and viola!


    04/6/06 10:15 PM at 10:15 pm

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