There are numerous targets to choose from during negotiations: Discounts, bonus agreements or perhaps even exotic add-ons, such as a production tour with a luxurious 3-day hotel SPA stay, provided the corporate rules play along😛

Especially in financially thinly positioned e-com companies, optimizing working capital can be a more sensible goal than simply tinkering with prices.

In advance a few

Definitions of terms

DPO…
Days Payment Outstanding = The payment term

DIO…
Days Inventory Outstanding = The inventory range

DSO…
Days Sales Outstanding = When you get the money from the customer

Cash conversion…
How long does it take until the money from the supplier invoice comes back from the customer (incl. margin).

2 things can be controlled in purchasing

The first is simple, you negotiate a longer payment term and thus increase the DPO.

The second is an optimization (reduction) of the DIO.
To reduce the DIO, there must be fewer goods in the warehouse on average.

How can this be implemented?

  • If an ordering algorithm is available, simply reduce the set storage range
  • A data link to the supplier enables large stocks to be identified, which means that less range would have to be kept in stock
  • you can negotiate and place more delivery dates for pre-orders (instead of purchasing an annual quantity in a single delivery, the pre-order should be divided into many (demand-oriented) parts, which reduces the average stock level)
  • negotiate premium shipping for immediate orders – if the supplier delivers everything within 24 hours, significantly less needs to be held in stock

In the best case scenario, we achieve a negative cash conversion factor with this approach (in the chart below, DPO has been increased and DIO reduced) and have thus improved the cash conversion cycle (CCC):

-> We receive money from the customer before we pay the supplier.
In certain constellations, it can even make sense to swap purchasing conditions for payment terms.

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