Buyer power tested in court.
Business relationships are not about ‘partnership’ but about exercising power to gain commercial advantage. This has again been shown in a current court case in Australia, where a major retailer is charged with ‘unconscionable conduct’. That conduct was to ‘ask’ tier B suppliers to provide cash (up to $1.4m each, with four days to pay), enabling the retailer to overcome its profit shortfall. In court, a senior executive of the retailer said the process “was a part of good ongoing commercial negotiations”.
Continuing its defence, a company spokesperson said “We believe our conduct was consistent with Australian and international industry practice to engage regularly with suppliers over product and category performance and that “asks” of cash to address profit margin problems was “normal”; even though the retailer had “no contractual right” to the payments.
The process was as simple as buyers and category managers provided with scripts and then telephoned suppliers. If a supplier refused to pay, they were considered as ‘not supporting’ the retailer, with the penalty unstated. In an earlier but similar case, another retailer’s staff were found by the court to be aggressive and threatening, even though some buyers and category managers “misinterpreted or did not understand the data and demanded payments that were over-inflated”. The retailer’s actions were found to be “deliberate, orchestrated and relentless”.
This is examples of using the power of size – through being a substantial buyer in an industry. Other ways a buyer can use their power are to exploit a supplier’s dependency on the buyer (or the supply chain) and to emphasise as a buying ‘lever’ the buyer’s brand, reputation, recognition or prestige. As large organisations continue to get larger, these three factors also increase in importance to suppliers. To counteract this trend, suppliers should consider the factors of power in their offering, that can be used in negotiations with buyers. Examples of power are:
Limit availability of an item:
- Availability of supply for an item that is difficult to obtain, controlled or constrained by the supplier
- Licence to operate provided to the supplier by a government
- Specialised knowledge that restricts the number of potential suppliers
- Spread of customers – the supplier reduces their dependency on large and powerful buyers; a low percentage of total sales to be conducted with any one customer
Technical capability concerning the item:
- Focused product – incorporating value added services into the product, which cannot be easily duplicated
- R&D – regularly providing new products and services that address customer needs
- Technology leadership – through holding patents, copyright and intellectual property (IP)
- Reputation and prestige – the ‘best’ supplier for a product or service range
Sales and Logistics together
From a supplier view and wherever possible, ongoing business rather than a one-off contract should be the objective – repeat business costs less to generate than new business. The focus should therefore be on gaining agreement for longer term fixed price contracts and long term product development cycles. To use this approach requires additional knowledge by the supplier, to underpin negotiations with the buyer:
- Supplier’s total annual sales by product line and SKU with the buyer
- Percentage of the buyer’s orders by category placed with the supplier
- Regularity and predictability of the buyer’s orders and timing of payments
- Suppliers ‘order fulfilment rate’ (delivery in full, on time – DIFOT) to the buyer
- ‘Cost to Serve’ the buying organisation and how the figure could be reduced
- ‘Total Cost of Ownership’ of the supplier’s items for the buyer. Incorporating
- number of SKUs
- location(s) for shipping and inventory
- ease of achieving presentation on a retail shelf
- order and payment process
- total door to door time and acceptance time at links in the supply chain
- Supply chain risks and scenarios (by buyer and supplier) to reduce the risks
- Ease or difficulty for the supplier to replace the buyer’s business
- Value of association with a large/prestigious buyer
The common mindset of buyers in commercial negotiations with suppliers is ‘you take the risks and I take the rewards’. Using their buying power, large organisations will generally focus on deductions and penalties against suppliers, rather than on mutually creating value. Buyers may also categorise suppliers into two classes, based on their relationship to the buyer; those in a monopoly/duopoly and cartel type situation (often, but not necessarily tier 1 suppliers) and those in a competitive supply situation – the two will be treated very differently.
It is therefore critical for a supplier to use the ‘supplier power factors’ noted above and to ideally place their business in the monopoly/duopoly and cartel type situation. This is the reality of negotiations – not what the promoters of competition in business want to hear! For Logisticians, the basis on which contracts with customers are negotiated has an influence on the total supply chain costs and performance. It is therefore of value for supply chain professionals to work with Sales to understand and have input into the negotiating approach – in some organisations, Logisticians are attached to the sales team for major accounts.