In your supply chains do you have partners as suppliers?

Roger OakdenProcurement

Partnerships rarely exist in business.

A major supermarket retailer in Australia has been accused by the regulator of ‘unconscionable conduct’ against suppliers, due to the power it can exercise.

The retailer’s buying power meant that it could aim for a ‘no risk’ approach to selling. It set a profit target for each category; if the retailer did not achieve the target, due to discounts, poor handling or other actions that were outside the knowledge of the suppliers, it charged the supplier for the ‘loss’.

Suppliers were told to pay the ‘profit gap’ (with no details of the calculation) and if they did not pay, the amount was deducted from their next invoice. Of course, this action was initially directed at smaller suppliers with limited resources to fight back.

With examples like this (which is not isolated), business writers and academics still talk about partnerships and partners when discussing relationships between parties to a business contract. It would appear that few have consulted a dictionary to find that a partnership involves the sharing of risk and reward.

As shown in the current situation, the starting point for negotiations is ‘you take the risk and I will take the reward!’ In my consulting and academic career, I asked more than 1,000 companies to provide substantiation that contracts with ‘partners’ met the definition. Only one company was able to comply.

Strategic procurement for your supply chains

The example of using power in relationships is not confined to retailers; I have experienced a global brand company that paid its major (monopoly) material supplier COD and its small suppliers on 120 days from invoice.

An underlying problem is the confusion between buying and procurement. For example, in retail, buyers are people who analyse consumer trends, forecast the sales range, identify products to meet the demand and then buy the product. However, with an approach to negotiations based on price and gross margin, they can find themselves up against the regulator!

To obtain better long-term procurement outcomes for any type of business requires recognition by senior management that procurement is a core part of the business and therefore the capabilities required of staff undertaking substantial procurement activities, including: spend analysis, category management, supply risk analysis, supply market research, negotiation planning, contract management and supplier improvement activities.

This does not make for ‘partnerships’ nor ‘win-win’ outcomes or other hype terms. Instead, it requires agreements that attempt to satisfy the business objectives of independent parties. The contract should also identify the time frame in which both parties can demonstrate their capabilities as a buyer or a seller, because that is the measure of whether the relationship will be long term.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...