Power-play in Supplier-Retailer Relationships…?
By Brian Moore, Global Retail Consultant and CEO of EMR-NAMNEWS

Faced with customers that exploit market share to impose unfair terms and conditions, suppliers soon find that relatively little help is available from Government agencies.

This can arise because of complexities in the definition of buyer power, lack of clear policy guidelines and vested national interests. In addition, the situation can be further complicated by the fact that current legislation prohibits suppliers from sharing insight and acting in unison against problem customers. In other words, suppliers have to help themselves by finding bespoke ways of managing ‘excessive’ trade demands.

Essentially, a buyer can make many different demands but those that cause particular disruption in supplier-customer relationships include reconciliation of disparities between the trade terms and conditions of two companies following takeover or merger, attempts by a customer to unify its wholesale and retail cost prices, and unjustified or ‘arbitrary’ attempts to increase profitability via extended credit and additional discounts.

When a supplier ‘allows’ indefensible differences in terms and conditions to develop between different customers over time, it becomes increasingly difficult to challenge reasonable demands from a newly merged combination of two customers to reconcile the differences, usually to the lowest common denominator. In other words, the newly combined customer is justified in attempting to correct an imbalance that should have been corrected by a supplier before the merger... This means that suppliers are obliged to ensure that any differences in ways of remunerating customers are performance-related, defensible and ideally transparent. All other elements of trading relationships should be standardised and capable of surviving comparison across the supplier’s customer base. After all, given the current levels of trade turmoil, the resulting mergers and takeovers will eventually reveal everything, so perhaps suppliers should anticipate the inevitable?

In the case of a retailer merging with a wholesaler, a different problem emerges. Given that they perform different distribution functions, wholesalers and retailers obviously require different margins, reflecting their different ways of working on behalf of the supplier. However, the real problems for suppliers is ensuring that both supply chains are kept separate following delivery, and absorbing the high cost of policing compliance. A pragmatic solution might be to accept that supplies could be merged, and agreeing a single price per SKU. Again performance-based reward might be considered, if the customer is prepared to permit and abide by compliance auditing.

However, the supplier-customer power-balance is really put to the test when a large customer in an ongoing relationship, with a remuneration package that has evolved to reflect relative risk and reward, makes unjustifiable demands on a ‘take-it or leave-it’ basis, confident in the knowledge that its 20+% share of a supplier’s business makes a refusal unlikely. Apart from the inevitability of the authorities, or even competitor retailers eventually attempting to curtail such abuse of power, the customer runs the risk of diluting current levels of collaboration across their entire supplier base. Whilst large suppliers can use their power to say ‘No’, the grudging agreement of medium and smaller suppliers to a compromised settlement should not be mistaken for willing partnership.

By default, the resulting alienation of the supplier-base can accelerate the transfer of market share to competitors, as all suppliers attempt to develop alternative and more reliable routes to consumer. By the same token, significant reductions in supplier support and brand equity eventually dilutes a store’s pulling power, and impacts staff morale at store level, with the inevitable reduction in traffic as the consumer is encouraged to seek shopping satisfaction elsewhere. It just takes time…..

For KamTips on ' Optimising Power in Supplier-Retailer Relationships' see Namnews – April 2008

Date article published: April 2008