Total Cost Management Content

Dynamic Discounting: Backdrop, Definitions, and Enablers [Plus+]


Editor's note: This is a refresh of our 2014 series on dynamic discounting, which originally ran on Spend Matters PRO.

This Spend Matters Plus brief provides a primer on one of the timeliest topics in receivables and payables finance: dynamic discounting. Note that by receivables financing we mean the selling or other leveraging of “receivables” as an asset on a supplying organization’s balance sheet to receive early payment. By payables financing, we mean the financing of early payment by a third-party (or the buying organizations’ balance sheet).

Even this subset of trade financing is a big and complicated topic, but in this analysis, we’ll discuss how dynamic discounting can reduce risk and create greater liquidity in the supply chain. If you’re in procurement or accounts payable and are new to the topic, this brief will be a useful first step in understanding what dynamic discounting is, how it can help, and which technologies and vendors can enable it.

‘I Think Demand Management Is the Bigger Play,’ Roy Anderson Touts Visibility into Spend, Risks of Not Buying In (Part 2)

“I saved you all $5 million,” procurement veteran Roy Anderson tried to tell one CFO he worked for. “To this day, he’s never totally believed that.”

In Part 2 of Anderson’s conversation about his career and digital changes in the industry, he talks about change management, demand management and how he did convince another CFO that Anderson’s team had saved him $150 million.

Anderson, now at Tradeshift, sat down with another procurement veteran, Pierre Mitchell of Spend Matters, to share some laughs and lessons about how the industry has adapted to technology over the last 40 years.

The following is the second of three-part series of their conversation, which has been edited for clarity. Part 1 ran Monday, and Part 3 will run Friday.

Why Purchase Price Variance (PPV) Should Be Banished From Procurement Measurements and KPIs [Plus+]

One of the biggest challenges to overall program impact and improvement in all but the most advanced procurement organizations are the raw elements that many procurement organizations measure themselves against: key performance indicators (KPIs). Of these, purchase price variance (PPV) is particularly obnoxious in all but certain cases. PPV measures the difference in price paid for multiple purchases for the same SKU, part or service. It is typically employed in standard costing environment in an ERP system for SKU-based items where actual PO prices are tracked compared to the existing standard cost.

This methodology is great for the financial accounting function. The PPV can be calculated easily by the system by accumulating the PPV until the new standard is calculated (and those variances posted to the appropriate general ledger account). A favorable PPV (i.e., price is less than the standard) is also known as a purchase price reduction (PPR). This all seems straightforward for the accounting department, but it’s not a great way to judge procurement performance, at least not on its own. Why?

There are numerous reasons why PPV can be such a misleading figure. In this two-part Spend Matters Plus series, we explain why PPV is a KPI that procurement organizations should stop measuring internal and individual performance against.

Improving Cost and Efficiency of Plant Operations

Capital equipment purchase is usually driven by business requirements and a stringent schedule, which makes it challenging to develop sourcing strategy while most of the MRO spend is to keep the plants operational. However, if procurement and supply chain take a step back and look at it holistically, they can identify some long-term solutions to these issues. Here are some tips to prioritize your approach.

Implementation Considerations in Quantifying and Tracking Hard Cost Savings [Plus+]

In my most recent Spend Matters PRO series on diagnosing the quality of your procurement scorecard, I discussed various types of procurement value measurement. This morning I’m going to dive into some frequently asked questions and cited issues regarding implementing the cost reduction related metrics. What are cost savings? Should we consider cost reductions or spend reductions? How do we define a baseline? How about when there is no cost / price baseline? And what tools can help me track these savings? Read on for my discussion of these and many other questions.

Strategic Sourcing Meets the Hermès and Charvet Set: A Corporate Travel Vote Against US Airlines

Back in 2013, I met with a senior procurement executive for a global bank after we had both had a couple of drinks. I always find talking to procurement heads of banks to be a fun endeavor (especially on the investment banking side – since they must represent spend requisitioned by the biggest prima donnas in the business world with their own set of John Lobb, Andersen and Sheppard, Hermes and Turnbull & Asser preferences). And all the better once they’re sufficiently lubricated to result in more great war stories.

Three Pitfalls to Avoid When Negotiating IT Professional Services

Technology purchasing is rarely a transparent process, especially when it comes to IT professional services. Despite the seemingly tidy packaging of hourly rates (as compared to, for example, complex licensing programs for software purchases), the risk of overspending is high. While much of this unplanned spending can be attributed to delayed project timelines and unforeseen circumstances, a large portion of it is caused by mistakes on the front end of the contract negotiation process. Here are several pitfalls to be aware of before signing your next agreement.

New Headwinds for Oracle Present Negotiation Opportunities For Software Buyers

For many years, Oracle has enjoyed fair-weather sailing, growing quickly to become one of the largest software companies in the world with annual revenues of some $37 billion. But the software market has changed in the last few years, and Oracle is starting to face some challenging new headwinds. Disappointing financial results, burgeoning third-party support offerings, the advent of SAP’s HANA DB, and a long-delayed Fusion strategy could be the perfect storm that takes the wind out of Oracle’s sails. Here's what savvy buyers should consider doing.

UPS, FedEx, and DHL Give a Sneak Peek into 2014 Rates

“What can I do to negate these cost increases?” is a critical question shippers should be asking themselves now. Waiting for the sticker shock of first quarter’s shipping expenses is a costly alternative. It’s important that shippers create a cost reduction plan that will optimize rates and service levels to ensure they’re shipping at the lowest cost possible next year.

Don’t Avoid Cost Avoidance (Part 1 – The Rant)

Cost avoidance gets a bad reputation for a few reasons. One is that it’s often defined narrowly like “it’s the amount of a supplier proposed price increase that we staved off." Who was on the tribal rules committee that made this scenario the de facto definition? I’m going to just throw it out there. Isn’t cost reduction really the same as cost avoidance? What?! I know this may sound like crazy talk, but hear me out. If you paid $10 for a widget, but then reduced it to $9, didn’t you merely avoid paying the old rate of $10?

Does Closing Factories Really Improve Profitability?

The oft-seen headline “Firm closes factories in effort to revive profitability” seems logical at first glance, especially when the savings from layoffs are highlighted. The stock always reacts positively. But think again – closing factories just makes the firm smaller, not more profitable. Consider the example of a firm comprising 100 factories producing identical goods and making an identical loss. Closing 20 of these factories reduces not only costs and losses, but also revenues. It leaves the firm 20% smaller but not financially healthier. In fact, a closure itself entails substantial costs and risks, so it could leave the firm smaller and financially worse off.

The Flip Side to Climate Change (Good News for the Ocean Freight Industry)

As climate change warms the world’s oceans, climatologists have closely monitored the percentage of Arctic Ocean that stays frozen during summers. In 2012, scientists took sophisticated simulations using satellite observations to estimate that Arctic summers may become ice free by 2020. Seven years from now, we will no longer have a large portion of the world surrounded by that unforgiving icy terrain. So what does this mean for you and your ocean freight carrier?