KamLibrary - When a Buyer Wants ‘Too Much’…

With financial pressures causing some retailers to attempt to compensate for falling sales and profits at the expense of suppliers, it is important that both sides agree to establish and preserve the ‘status quo’ in a trade partnership.

In other words, a business deal has to be an agreement to conduct the supplier-retailer relationship on a zero-sum basis, whereby any gain by one party will be at the expense of the other party, unless equivalent value is given in return, thus maintaining the status quo, or balance of needs-satisfaction in the partnership.

Given that a trade partnership is based upon a negotiated commercial settlement between ‘equals’ and presumes compliance in an environment of trust, this status quo needs to be maintained in order to ensure longer term investment in the relationship by the supplier. It follows that a one-sided demand or short-term action by the retailer automatically abuses the rights the supplier was led to expect upon entering the agreement, unless reciprocation is possible.

Obviously, major suppliers are capable of insisting upon their partnership-rights when these are challenged, and can resort to litigation where necessary, but medium and smaller suppliers have little alternative but to acquiesce or face the consequences of walking away from a customer that may represent 20% or more of their turnover. A solus use of a legal route is not usually a viable alternative.

However, a case has emerged where small suppliers are considering combining forces in class action suits to reverse the cancellation of negotiated agreements arising from the takeover of Coles Supermarkets in Australia.

In practice, litigation has to be a last resort and, given the legal problems associated with open discussion of these issues, suppliers need to evolve a set of criteria that will enable them to quickly recognise when the latest demand falls outside the limits of the status quo ‘ball-park’ and act accordingly.

Knowing how much is ‘too much’ requires that suppliers determine the size of customer in terms of total sales and profit objectives, and quantify each element of the relationship in terms of financial impact upon each partner’s business.

This means that each concession should be measured in terms of cost to the giver and value to the receiver, thus allowing all concessions to be matched and traded in order to arrive at an equitable joint-agreement, within the context of total sales and profit. In practice, the cost of any one-sided demand or action should immediately be calculated by the supplier, and converted into incremental sales required to break even, in order to indicate the mode and scale of response.

This will allow a supplier to quickly calculate whether a demand for a significant increase in days’ credit or the imposition of an incremental settlement discount so distorts the base agreement that a fundamental review or even dissolution of the partnership becomes necessary.

Any change in the buying process, such as the amalgamation of formats/divisions, aggregation of purchasing or changes in the agreed use of trade funds within a joint business plan need to be quantified in terms of cost to the supplier as a basis for identifying and quantifying reciprocal concessions required in return, in order to preserve the status quo. A refusal to negotiate by the other party should be seen as a deliberate attempt to destabilise the commercial agreement and be treated accordingly.

Ideally, all of this should be captured in a robust agreement that could become the basis for litigation, if necessary. The risks and opportunities implicit in current supplier-retailer relationships now demand this as a minimum standard.

Anything less becomes Too Much of a liability….

Date article published: August 2008

For KamTips on 'Deduction Reduction…' see Namnews – August 2008

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