Margin Transfer Tricks and Such …

Last week, Dave Stephens posted his "top five margin transfer" tricks that buyers "use on their suspecting but often powerless supply base." To this list -- which is a great read -- I would also add the infamous "suppliers fund the reverse auction" tax, which I've now heard a number of cash-strapped buying organizations use. Under this approach to funding e-sourcing initiatives, the winning suppliers must rebate a set fee or a percentage of the overall deal back to the buying organization upon contract award to cover the cost of the sourcing software.

Dave's trick #3 is particularly worthy of calling out. Dave calls it "The Big Red 'Pay Me Now' Button". Under this approach, "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." It's rumored that Dell is using a more advanced variant of this today.

Personally, I believe that it's this type of margin-transfer trick which is probably the most sustainable and the most beneficial to both buyers and suppliers. This is because it comes down to choice, not arm twisting. And there's a universal need for it, especially in developing countries where cash is often the limiting factor in LCCS deals, and where suppliers often demand letters of credit not because they're worried about receiving payment, but because the letter is a document they can show to a bank to borrow off of to fund ongoing operations.

Personally, I believe that supplier networks should offer this type of creative financing to participants and should be able to skim off a basis point or more off of each transaction where a form of early payment reverse financing is involved. Ariba, Perfect, Ketera, and others should build this into their core capability. If capital is a concern, they could partner with financial institutions to ensure adequate liquidity.

Jason Busch

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