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Payment Terms & Rebates: It’s Not Just About Transparency, It’s Also About Ethics

February 12, 2008

Over on Spend Matters, Jason Busch picked up on the Wall Street Journal article highlighting payment terms and supplier rebates. Apparently the Federal authorities in the US are upset by suppliers who impose long payment periods onto their vendors and then take early payment discounts, which of course they do not reflect through in their pricing to the Government.

In responding to Jason’s article, I made the following comments – and came up with an idea. Because I agree with Jason (and the Government) that this is at best a disingenuous policy and at worst it is unethical. It is the sort of practice that undermines trust and damages corporate reputation – ethical Procurement organizations should not do it. 

IACCM research has shown that the practice of imposing ‘early payment discounts’ is not pervasive, but it has become increasingly common and is an example of the misuse of power by some of the largest (and more arrogant) corporations.

In my experience, these early payment discounts are unilaterally applied, rarely negotiated and often appear in the agreement only after a price has been negotiated. Obviously, large corporations tend to resist them; but for smaller companies (such as IACCM, which has suffered this approach on things like membership and conference fees), the leverage is not there and it is a choice of accept, or lose the business.

However, the Wall Street Journal (and Jason’s) article does not highlight an even more iniquitous practice. I have come across several companies that extract their ‘early payment discount’ even after they have taken the 60 – 90 day payment term. When challenged, they say that the early payment period only starts ‘following receipt of the invoice by accounts payable’. But the invoice address they provide is not accounts payable – they deliberately build in internal review procedures that ensure the ‘double whammy’ of late payment AND discount.

Perhaps we should begin a ‘name and shame’ catalogue on our respective blogs, highlighting these essentially unethical practices? Perhaps our readers have some examples they would like to provide to get us started! If so, please add them here.

One Comment
  1. Ben Furtado permalink

    My comments to this topic Payment Terms & Rebates Ethics

    Payment Terms & Rebates must be negotiated under a Supplier Performance Agreement for it to be ethical.

    The ageeement would be based on:

    1. Delinquent delivery performance that will cause non productive activities
    2. Quality that affected production lost and financial lost
    3. Supplier must be accountable for thier actions and the customer should also be accountable for their forecast committments. Both parties must develop a well defined agreement that will calculate the % of rebates and extention of payment terms.

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