The 10% hiding in your supply chain

There is real overhead involved in offering customers credit terms and all customers pay for it. Accounts receivable staff, time spent on collections, time spent handling the account prior to the order, credit checks and assessments, time spent by management reviewing accounts, additional audit requirements and fraud management are all additional costs that need to be recovered from customers in the form of higher prices. If you are working with a business that extends you terms, you are paying for them to collect the money from you and every other customer.

In addition, some customers pay late and some do not pay at all. All these expenses add approximately 5–10% to the total cost of a product. As an example, Cisco publicly disclosed in its January 2015 annual report that its Allowance for Doubtful Accounts was 5.6% of its gross accounts receivable. For every $100 of Net payment terms Cisco extends, the company only expects to be paid $94.40. Cisco is a well established company with long relationships with its customers, great access to credit information and a well resourced accounts receivable and finance function. For suppliers without these resources, the write-offs can be much larger.

This creates a situation where customers that do pay are subsidising customers who don’t. We think it’s much more effective to just charge less and pass the discount on to our customers. In practice, the price difference can be between 5–10%.

You can’t just ask your current supplier for a discount for paying early and expect to get a maximum discount. The costs related to offering terms to other customers are relatively fixed and won’t be wiped away by only your orders. Worst of all, they might not prioritize your order once you’ve paid for it because they have other orders at the same time that need to be shipped and collected for them to be paid. You are now a second priority. Buyers only realise this 5–10% savings if they are working with a supplier that only works on payment on order and before shipment. We are only able to achieve the price and service benefit of on-order and before shipment payments by focusing exclusively on that method of doing business within a given product category.

Payment terms are important in making sure there are the right incentives for everyone involved. With a payment being made before manufacturing, the supplier has the confidence that the buyer is very invested in ultimately paying the full price of the finished product and not cancelling the order or delaying payment. With a balance due only when the goods are ready, the supplier has a strong incentive to manufacture and receive the rest of the funds, because there is no balance payment without a finished product.

The payment terms mechanics are especially important when dealing with buyers and suppliers in different countries. It is very rare to see buyers and suppliers suing each other over contracts if they are in different countries, because in practice it can be very difficult to enforce contract provisions in a timely and cost effective manner. This is where the incentives become crucial.

At Vox Supply Chain, there are two times during an order where a customer makes a payment:

1. On Order: When you place an order and pay a portion of the order value right away, you are providing some cash immediately to the supplier to pay for materials for your order.
2. Before Shipment: After everything is ready to go for your shipment, the balance amount is paid.

A pay in advance system like ours relies on trust and the right incentives. We have a lot to lose on every order from not delivering well for our customers. Therefore, we have built up a strong expertise in supply chain logistics and making sure products are delivered efficiently to our customers. We do what we say we are going to do and for the past 6 years, that has helped us to grow our business. The world has become quite small thanks to the internet and our reputation would not be as strong if we played games with our customers.

One benefit to this approach for our customers is that we don’t require contracts or purchase orders. If you’d like to send us a purchase order, or need one internally at your company, we are happy to receive them but they aren’t required. All you need to do to buy from us is checkout on the site and pay the invoice we send after you checkout.

We are always open to comments, feedback and suggestions, so please feel free to email us at hello@voxsupplychain.com