The True Cost of Rebates and Relationships
Is there a cost to your dependence on rebates? Yes, if you’re not considering the cost of waiting for that annual rebate check, you may be overestimating the benefits.
In today’s dynamic business environment, companies are under increasing pressure to operate efficiently and with greater control over their working capital. To provide flexibility in ongoing operations many finance departments are holding on to more of their cash so it can be put to work throughout the year. For procurement, that means buying smarter, reducing costs, and spending less in the present rather than waiting for a big rebate check next year.
Historically, procurement professionals would contract with suppliers on volume rebate programs, especially for indirect spend, that would guarantee a rebate check in the future for purchases made in the present. Since that rebate would grow along with the purchases made, the rebate could be significant. That would entice companies to look at it as an annual bonus from a supplier, but that money is a lot less free than you might think.
It’s important to remember that suppliers are not in business to lose money; that their working capital and cash flow are as important to them as they are to you. Consequently, any program that benefits your business is also calculated to benefit theirs. Which is fine; win-win is good for the relationship between buyer and seller. However, any good negotiator will want to have the benefits more skewed towards your own business.
Upfront discounts vs. backend rebates
When it comes to indirect spend, procurement often underestimates the amount of money spent on non-core but essential products like printers, office supplies, MRO products and services, etc. Because the individual purchases are often lower dollar figure items, and because purchases of such items are often decentralized, underestimation of total cost is understandable. But, according to an Accenture study, a billion dollar company will waste about $15 million due to a lack of control over that spend.
Even if your company is not in that billion-dollar range, you can see the impact this can have on your bottom line and your cash flow. If procurement’s contract with these indirect spend suppliers includes a rebate program, a lack of oversight over individual purchases can lead to a focus on the rebates achieved through cumulative purchases rather than the savings that can be a result of smarter, upfront discount purchasing. This can lead to behavior that increases spend to hit a rebate target versus looking to improve cash flow in the short term when it is needed.
Hitting the tier
You may look forward to that big rebate check at the end of the year and that desire works to a supplier’s benefit. Suppliers will adjust margins to cover not only the rebate but will also benefit from the added cash they gain at purchase at the higher price point.
Additionally, volume rebate programs usually have tiers; the higher the tier purchases, the bigger the rebate check, incentivizing procurement to spend more. For example, if procurement has purchased enough inventory but is close to the next tier that will get them a larger rebate at the end of the year, they may choose to make one or more purchases that will get them to that next tier. Hitting that tier means more sales for the supplier and excess inventory for you. That translates into money allocated that could be put to better use to help you stay competitive.
Leverage Relationship to Save Money Today
As a new strategy, companies are now looking to upfront discount programs offered through third-party providers. These programs are managed by the provider who uses the aggregated purchasing power of their client base to negotiate significantly better deals with indirect spend providers than many companies can achieve on their own.
These programs establish consistent pricing, regardless of where or when the item is purchased and in line with any contract terms in place. In addition, all invoicing and payments to suppliers are handled by the provider. That results in your supplier receiving payments faster while you hold on to your cash until a later, agreed-upon date. Plus, you create a single payment for all indirect purchases made through the program which cuts the cost in time and money of multiple payments to multiple suppliers multiple times in a billing period. This all translates into greater cash flow and more control over your working capital.
Ultimately, your goal should be to have your money work for you more than it works for your suppliers. Consider how much you might be able to save upfront over the course of a year and then consider what you might have actually given up the previous year through a rebate program.
If you are unsure of how much your indirect spend may be costing you, download this Corcentric white paper.