How to make profitable deals with more powerful trade partners in an economic downturn
The ongoing recession is most countries is causing unprecedented pressures for retailers to maintain or even increase historic levels of ROCE, resulting in attempts to pass many costs and risks back up the supply chain. Given that the ‘easiest’ moves are requests for extended-credit, cost-price reductions, and even contributions to price-fighting funds, such demands should not come as a surprise to battle-hardened suppliers.
The big guys can obviously take care of themselves, but medium and smaller suppliers may feel unable to risk a refusal. In such cases, the lack of resistance should not be mistaken for acceptance. On the contrary, a realistic retailer fully appreciates that a ‘take-it or leave-it’ demand can result in additional hidden costs each time a supplier leaves a buyer’s office, determined to get even, because they cannot afford to get mad. This cannot be good for either buyer or seller in the long-term.
An economic downturn provides opportunities for both parties to re-establish the fundamentals of a buying-selling relationship, the rules-of-engagement that reflect a fair balance of risk and reward for each party. The ‘morality’ of a supplier-retailer relationship simply provides these rules-of-engagement as a reference point, a basis for efficient buying and selling, an accepted status-quo where the cost of ensuring supplier and retailer compliance does not dilute joint-profit in a trust-based relationship.
These working terms and conditions should be sufficient to protect the rights of each party. Government intervention is clearly not the answer. A general code-of-practice is simply a belated acknowledgement of a situation being so wrong that Government intervention is deemed necessary. It cannot and should not be necessary where common-sense rules govern the buyer-seller relationship.
Over time a supplier’s relationship with a major customer will have settled into a balance of need-satisfaction and compromise, on terms that represent a fair deal for each party. In the process, all agreements reached should obviously be sufficiently robust to withstand legal-testing, but litigation itself should be acknowledged as merely a way of formalising the dissolution of a broken relationship, and not a means of ensuring compliance.
In recession, the buyer simply becomes more discerning, wanting clear evidence of value for money compared with alternative product offerings. Similarly, a supplier needs guarantees that a joint-agreement will be honoured by both parties, to agreed terms, as the basis of a win-win relationship. This agreement then provides a secure environment within which to manage appropriate levels of trade funding and other investment in the partnership.
Negotiation is then about integrating the supplier’s offering with the customer’s business, in effect changing the shape of the offering piece by piece in order to better fit the need-profile of customer and shopper, in a series of compromises by each party. The resulting costs of tailor-making are then absorbed within this ‘give and take’ process, all within the terms and conditions of the base deal, preserving the status quo.
It follows that any additional ‘give’ must be matched with a ‘take’ of equivalent value in order to reflect and preserve the balance of power and mutual need that has been created between the two parties, a truly zero-sum game. Anything less is an abuse of the other party’s rights. In other words, a demand for a significant increase in credit period should be quantified and used as a basis for a demand of equivalent value by the other party. A failure to achieve such a concession in exchange represents a net loss to the partner, a breach of trust and a ‘win-lose’ in practice.
Finally, the supplier-retailer relationship should not be regarded as a shop closed to medium and smaller suppliers, a ball-park where “giant” replaces “joint” in a joint-business-plan. The little guys matter too in that their size can allow greater flexibility, innovation and an ability to match retailer needs more accurately, especially in niche areas. Medium-sized suppliers, correctly motivated within the security of a trust-relationship, can combine advantages of suppliers from either end of the scale spectrum.
Ultimately, it is a given that a seller’s need to sell is always greater than a buyer’s need to buy. Operating to a set of mutually agreed fair-share rules can help both parties to optimise the relationship for their mutual benefit, in spite of economic turmoil…
