At the end of what appears to have been the toughest year in retailing, it may be appropriate to reflect on how the harsh realities of 2005 might provide a wake-up platform for a positive approach to next year….

With Unwins and MVC providing 'living’ proof that suppliers are not the only casualties in the price-reduction stakes, it is fair to say that suppliers have now reached their cost-reduction limits, are at the ‘walk-away’ point, and have to move forward via negotiated price increases…

Incidentally, if a supplier has not achieved scale economies to date, it is not going to happen in next year’s trading environment.

Role of risk in supply and retail

Ability to assess and manage risk will differentiate winners and losers in the future. This means first accepting and living with the fact that the supplier is the main risk-taker in the buying-selling relationship.

The retailer operates in a high-speed environment, in that a decision to double or cancel a next-day delivery is only a phone call away, whereas a supplier needs to have received such a request a week previously… This means that in the case of a buying mistake, if the tab is not picked up immediately by the supplier via returns, then the ‘miscalculation’ can be rapidly worked through the retail system via price reductions, possibly financed by the supplier.

Banks do not knowingly take risks, preferring to ‘lay off’ any exposure against the borrower’s assets with the benefit of 200% cover, thus presenting banks with no problem in selling off an asset for 50% of its value on liquidation.

Meanwhile, Government Tax and VAT departments have first call on liquidated funds, again eliminating any risk, with any losses recouped via the taxpaying public in their ‘cost-plus’ environment…

Government intervention in market risk

This leaves the possibility of government intervention to correct ‘unfairness’ in the market in terms of demands for cost-price reductions, increases in retrospective payments or extending of credit terms. Realistically, a government will not, should not, and cannot intervene in an open market, except where influential consumer-voter rights are being compromised, through restrictions in choice or excessive prices.

It has to be accepted that the public, and therefore the government, do not ‘do unfairness’, so energy that might have possibly been wasted in complaining about abuse of power should be more effectively directed at identifying customer need and establishing points of difference in a supplier’s offering versus alternatives available to the customer.

Realistic opportunities for suppliers

By first clarifying the scale of opportunity for business growth within a major customer, suppliers can then begin to assess the extent of their demonstrable competitiveness in meeting real customer need. Given a willingness to play the walk-away card, the supplier will be in able to establish a firm basis for negotiating appropriate price increases next year.

Market threats have already been made painfully obvious in the past year and it has become clear that survival in 2006 requires new levels of pragmatism that include working around weaknesses, rather that wasting time trying to totally eliminate faults in a business, and thereby conserving maximum energy and resources for optimising of strengths.

Moreover, it is this pragmatism, coupled with a high degree of self-reliance in risk management that will make 2006 different and successful for real-world players…

Achieving in a real world means managing risk….

Supplier success in 2006 will be about identifying and developing opportunity in a high risk environment. The ability to measure and manage business risk means first clarifying the company’s risk-profile, in other words establishing whether the company is risk-averse (forget it), risk-neutral in terms of a willingness to take some risk, carefully, or risk-seeking in being willing to take chances, accurately quantified in terms of downside.

When it comes to the customer base, this means taking for granted that not all retailers are going to survive in next year’s trading environment. Potential casualties will already exhibit the usual symptoms in terms of weakening ROCE, sales and profit performances, possibly in addition to increasingly irrational displays of aggression and demands for increased trade funding, extra terms and cost-price reductions…from an increasingly weak power base.

Any temptation to support weakness by extending such help needs to be tempered with the realisation that upon liquidation, every £150k owing to a supplier who makes a net profit of 5%, requires that the supplier generate £3m incremental turnover in order to recover lost profit…

Grading the customer-base in terms of relative risk will help in allocating increasingly scarce resource.

Facing up to the ‘walk-away’ point

It is then necessary to convince the company that a ‘walk-away’ point has been reached in order to preserve credibility in the marketplace. In practice, this will probably be the subject of more negotiation internally than with the customer.

This means spelling out the consequences of walking away from significant amounts of customer business in terms of impact on brand distribution, manufacturing efficiencies and logistics optimisation.

It is then crucial that KAM be authorised to refuse to concede, without fear of collective loss-of-nerve when threatened by the customer. The stakes will be too high to allow any appeal to higher authority to compromise this walk-away stance.

Assessing opportunity, realistically

Only then can business opportunity within the customer be defined. In other words, the KAM has to systematically assess the extent to which existing shoppers can be persuaded to buy more of the current products, try new products from the same stable, new shoppers of similar profile to try current products, and to quantify the chances of new shoppers going direct to new products. These are the limits of the opportunity options.

Next it is important to factor in the Threats in terms of regulatory/legal/political developments, cultural/social change, technological change, trade concentration/power/internationalisation, and competition (innovation/substitution/wealth/ risk-policy), all based upon a ‘real-world’ assessment of probability and degree.

Capitalising on relative strengths

Remembering that strengths are relative to opportunity and need to be compared with available alternatives, it is important to objectively and systematically assess the company’s ability to meet customer need more effectively and efficiently than the competitor, on a like-with-like basis. Any discovered weaknesses or ‘negative strengths’ need to be neutralised (elimination takes too much time) by compromising their ability to dilute strengths.

Only then can the KAM have the confidence to build a realistic negotiation platform, secure in the knowledge of real customer need, and confident in the company’s ability to meet that need, better than the competition.

All else is false optimism, and at best, recklessness…

N.B. If you like the approach and want to put it into practice why not try our new 1-day workshop: Negotiating Price Increases via Advanced-Level Dealing at www.kamcity.com/emr-namnews/workshops/negaudit.htm

Date article published: 23/12/2005

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