John Bentley is the chief financial officer for World Auto Parts Corporation the company buys approximately USD 500 million of auto parts every year from small suppliers all over the world and resells them to auto repair shops in the United States. The majority of the suppliers have cash discount terms of 2/10 n/30. John has instructed his personnel to pay invoices on the 30th day after the invoice date but to take the 2 percent discount yet though they aren't entitled to do so. When a supplier complains John instructs his purchasing agent to find another supplier who will go along with this practice. When a few of his own employees questioned the practice John responded as follows
This practice in reality does no harm. These small suppliers are a lot better off to go along and have our business than to not go along and lose it. For most of them we are their largest customer. As well if they are willing to sell to others at a 2 percent discount why should they not be willing to sell to us at that same discount even though we pay a little later? The benefit to our company is very considerable. Previous year our profits were USD 100 million. A total of USD 10 million of the profits was attributable to this practice. Do you in reality want me to change this practice and give up USD 10 million of our profits?