We agreed with a key long term supplier, whom we have an excellent relationship with, to change payment terms from 1%10 n30 to straight n30. In return the supplier brought their price down. We took advantage of the payment reduction but 2 of our 4 divisions missed the change in payables and continued to take the 1% discount. The supplier noticed after 15 months and is asking to go back and reclaim the improper cash discounts, adjusted for cost of money. I agreed to go back 30 days but supplier feels I am not being reasonable. How far back would you go in correction of an error?
Correcting a supplier billing error
Answers
Vernon - This is a tricky situation. You would handle this differently since they are a key supplier (I'm assuming this means they play an important role in your company's success.) than if they were a standard commodity - say office supplies. The answer may be somewhere between 1 and 15 months. Maybe the current quarter or part of the current fiscal year - potentially use the argument that prior period adjustments are not possible. Also, is there something you could ask for from the supplier, such as free
I have to disagree with Nicole. While it was your supplier's error in not catching, and your error as well, in either case you had an agreement.
As such, refund the 1% to the supplier and keep a) the cost of money over time and b) your key relationship.
I think your relationship trumps any assignment of responsibility for not catching this in a timely fashion. Thirty days is a bit of an insult if this is a key supplier. They reduced their prices and lost some cash float in this arrangement. If you were on the receiving end what would you expect, or your board members (should they be at this level of detail)? I would recommend the minimum of splitting the time this was not caught and offering 8 months. The last thing you need is to have this in their memory the next time you approach them for something.
I agree with Wayne. Honoring the agreement and the spirit of the agreement is the key. How you respond will set the tone of your relationship in the future. In business errors will always occur on both sides of the table. Benefitting from someone else's error is not recommended.
Well shame on the supplier for not reporting the underpayments to you months ago -- their receivables dept must have been asleep at the wheel carrying quite an overdue balance for a long time.
Maybe you get some slight negotiating cred from their delayed error catch. Try asking nicely for some degree of a lower settlement than 15 months (split it?), but with a key vendor I would not make it a big issue for many other business reasons. If they even sound like they are not budging, then pay what you committed to (but no cost of money -- adding discounted cash flow concepts in this cash interest rate environment is rather petty).
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