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Bad behavior

Scotwork Team

Over the weekend there were reports in the UK media that the multinational retailer Laura Ashley had written to its suppliers requesting an immediate 10% cost price reduction on all orders already agreed and contracted. The demand was accompanied by a statement that this would save Laura Ashley the need to review its supplier base - in other words, failure to agree would prompt such a review, and some suppliers would inevitably be delisted as a result.

This behavior, far from novel, is however becoming more and more common. Debenhams, a UK department store group, wrote to some suppliers earlier this month demanding a retrospective discount and to other suppliers' unilaterally increasing payment terms from 90 to 120 days.

John Lewis, a UK department store group, has demanded rebates of up to 5.25% from the majority of its 3,000 suppliers despite announcing record profits. According to "The Guardian", John Lewis wrote to one supplier stating that a rebate would be automatically applied to their previously agreed pricing. When accused by the press of "greed and bullying", they claimed that the rebate requested was fair because it was linked to increased turnover. Seems to me that this is disingenuous; if the buyers haven't already factored volume rebates into the original pricing, they aren't doing their job properly; if they have and this is simply an additional demand, then greed and the associated power-play would seem to be the only motive.

Skeptical readers will come to the obvious conclusion about who wins as a result of this retailers' tactic because the rebate, or a goodly portion of it, almost certainly ends up on the bottom line of the retailers' P&L. As consumers we should be demanding that these rebates are passed on to us when we are at the checkout. But another winner is the procurement function. Every time they try this ploy some weaker suppliers will succumb and agree the new terms. This leaves the future negotiating power of these suppliers significantly weakened, and encourages a repeat of the bullying behavior by the buyers.

Retailers trying for unilateral price increases or other changes to terms on existing contracts might ponder the following questions:

Is your behavior tactical or strategic?Are you looking for an easy short term boost to the profit line for this month/quarter/year, or is there a medium or long term plan. Your behavior will certainly have repercussions - poor trade publicity, irritated suppliers, and significant pushback. In extreme situations maybe even the demise of the supplier. You can also expect the public not to be on your side; what with horsemeat, difficult warranty claims, product recalls, pricing consistently higher than the internet, and so on, they don't like you to begin with

Is a letter or email the best communication method?However you phrase it will read as an impersonal demand. How about a meeting?

Is the money worth the effort?A few %age points discount may be a significant sum if the turnover is significant, but not compared with what suppliers might be prepared to trade if you take a more creative approach.

Does this behavior reflect your corporate culture?If your business model is that you don't care about brands, are only interested in price, have no desire for long term relationships with your suppliers, then unilateral action is right for you. Other cultures should beware.

Is this part of your 'keep them guessing what comes next' buying style? Because if it is, you need to get real about the capability and competence of your suppliers. They absolutely get it, and even if they succumb to your demands in the short term they will look for opportunities to get their own back -imperceptible lowering of quality, delays in delivering, and more stringent views on returns and so on.

For suppliers on the receiving end, some different questions:

Is your indignation a little misplaced? Wouldn't you increase prices to your retailers if an appropriate opportunity presented itself, for example a surge in demand for a product you had stock of which pushes the price you can command in the market upwards? Pot-kettle-black springs to mind.

Can you get away with doing nothing? These ploys are as embarrassing to some buyers as they are irritating to you. Ignore it and it may just go away!

Can you cite a principle?If you have demonstrated in your past relationship with the retailer that your business behavior is determined by principles (you always pay on time, and expect others to do the same, you always use fair trade ingredients, you never pay third-world wages and so on) then you might advise the retailer that you never renegotiate existing contracts, as a matter of principle. However you might have flexibility elsewhere…….

Is your response tactical or strategic? Just agreeing to pay will significantly weaken your power; the buyers will just take you as a soft touch for evermore. Telling the retailer to **** off maybe give you a warm feeling, but might also leave you with gaping holes in your production schedule if you get delisted. Look closely at who-needs-who more, and react accordingly.

Will persuasion work? By all means ask for a meeting with the procurement people and argue your case, but recognize the limited chance of success. It is the stuff of every barrister-in-waiting that an impassioned speech and closely reasoned argument will produce a Damascene conversion by the judge and jury. So it is with buyers. Maybe better to have some wish list items available to trade the price reduction against, or alternatively the draft of a solicitor's letter citing breach of contract if the facts support it.

Can you mirror their behavior? If their expectation of increased turnover merits a price reduction from you, will they agree that there will be a price penalty if turnover is lower than forecast?

We hope this provides some food for thought. As they say at the end of some TV documentaries, if you have been affected by any of the issues raised in this blog, please call the helpline at 973.428.1991 for advice, or make a comment below.

The Scotwork Team

Scotwork Team
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