Ten secrets of a happy supplier marriage

There’s little love lost between retailers and suppliers. In the everyday battle to maintain margin and thrive in the competitive retail world, suppliers often bear the brunt of many retailers’ ruthless streak. As retailers continue to face cost pressures from all sides, an obvious solution is to take it out on their product partners and hammer them on price and payment terms for all they’re worth.

The balance of power has been shifting towards retailers for years. Light-hearted references to marriage guidance and counselling aside, it’s a serious issue and grocers, in particular, need to be careful.

The government is proving increasingly determined to protect suppliers’ interests and the Department for Business, Innovation and Skills is planning to establish an ombudsman to “adjudicate between suppliers and retailers and protect against unfair practices”.

In the Draft Groceries Code Adjudicator Bill, currently going through parliament, it also emerged last month that grocers could even be forced to take out ‘mea culpa’ adverts in newspapers if they abuse their relationship with suppliers.

There will even be many instances when suppliers themselves would say a retailer is fair and reasonable to deal with. However, every retailer could benefit from scrutinising the way in which they do business. All too often it is based on short-term gain, rather than building long-term relationships.

As David Noble, chief executive officer at the Chartered Institute for Purchasing and Supply says: “Short-termism drives short-termism behaviour. No company will respond to wrong behaviour.” Suppliers are, he points out, the ones that drive most product innovation. Which supplier will happily devote their resources into meeting retailers’ creative demands if the relationship is sour?

Finding retailers who would willingly discuss what they are doing to improve their supplier relationships, even off the record, was virtually impossible. The reasons are obvious, but this doesn’t speak volumes for the attention many pay to what is an essential part of their business operations. But are you getting the most out of your supplier relationship? Here are 10 ways to help ensure you are.

Prioritise

Many retailers take a ‘one-size fits all’ approach to supplier management, but different types of relationships will benefit from different approaches.

First, define the role of each supplier with whom you work. Aidan Bocci is chief executive of management consultancy Commercial Advantage, which works with consumer goods manufacturers and retailers. He says: “Retailers need to be really clear about the suppliers they can grow with and treat them differently.”

Prioritisation doesn’t just boil down to how much money the relationship is worth. Does a supplier play a major role in your future strategic plans? Is it a ‘challenger’ supplier who might not necessarily be that big, but has a role beyond the core categories that it supplies? Is it one you could push further on price? Or perhaps it’s a supplier whose products will translate well internationally?

The need to prioritise suppliers, in part, comes down to the resources needed to manage supplier relationships. Generally that resource is
relatively finite and the more suppliers it is spread over, the less effective it will be.

Promote your virtues

It can be easy to think suppliers are the ones that need to do the self-promotion - after all, they need to sell their product to retailers to keep their businesses afloat. But actually, retailers could benefit from considering why they might be a more attractive business than their competitors for suppliers to do business with.

“What makes a supplier value your organisation? How can you ensure that a supplier prioritises you when necessary?” says Steve Wallis, head of procurement at procurement solutions provider buyingTeam. He adds: “It’s not just about spend - everyone spends. Part of it is the language you use to communicate with suppliers.” Ultimately, if retailers understand what makes them an attractive business to work with and use every opportunity to get that across, suppliers will keep them front of mind should they have to prioritise one of their retail customers over another.

Don’t be protective

Trading teams can sometimes become too precious over communication and prevent their suppliers having any contact with other departments. Trading teams are those responsible for managing the day-to-day relationship, so it’s an easy trap to fall into - but it can also escalate into a situation where they prohibit communications with other teams for no obvious reason in a bid to look all-powerful. “The trading team is often so focused on their own objectives, they’ve not formed an objective of the whole team. The critical thing is they need to be a conduit for multifunctional interaction,” says Bocci.

If they are not, opportunities could be missed - be that marketing opportunities to drive footfall or web traffic, for instance, or packaging improvements in the supply chain.

Be open about the facts

It sounds simple, but many retail teams do not convey vital stock information on a regular basis. Simon Showman, chief executive of sourcing and development supplier Ultimate Products, urges retailers to be clear about their stock levels. “They need to be more open with information so we know what to do for next season - be that different products or different pricing,” he says.
Part of the problem is the sheer size of many retail businesses. “A lot of the smaller customers [retailers] have gone. It’s all the big boys now,” adds Showman. A lack of internal organisation can either mean that retailers don’t actually have up-to-date information on unsold stock or that communication is overlooked. Equally, in some cases, the desire to be seen as the powerful party can mean they are deliberately not forthcoming with information. Transparency, however, is the only way in which suppliers can work with retailers to help them shift more product.

Negotiate fairly

By definition, negotiation should result in the best possible outcome for both parties but, in reality, it becomes more of a tug of war. As Bocci says: “It becomes about who can win the most in a short space of time.” Michael Ross, co-founder at eCommera agrees: “A lot see it as a zero-sum game. There’s a battle between them and any margin point gain on either side seems a win.”
Both retailers and suppliers need to avoid getting into a situation where all they ever do is negotiate. It’s not all about short-term gain - two-way discussions are essential if retailers are to forge long-term relationships.
Bocci says: “You can create a profit pool by creating trust so you share everything to grow the best possible part of the pie”.

Accept mistakes

If a supplier slips up, many retailers will be quick to slap them with a financial penalty. No retailer can run their business with late or incomplete deliveries, or faulty product. But as Phil Duffy, partner at corporate restructuring firm MCR, says: “Occasionally a supplier will make a mistake, as retailers do, but retailers have to consider whether charging them for that is really necessary.” In the long term, it will only put the supplier in a weaker financial position and they will be less inclined to help that retailer out when needed.
Poundland chief executive Jim McCarthy attributes some of the success of its business to the fact it is reasonable with suppliers: “We don’t impose penalties and we pay on time and in full.” This leads to cost savings for both parties and can result in effective negotiations. “We don’t need brand managers supporting us because the cost for the supplier to serve us is cheaper,” he says.

Articulate your long-term goals

Conversations between retail teams and their suppliers are often dominated by the nitty gritty: product decisions, orders, price, timings - all essential stuff. But those who liaise directly with suppliers also need to be able to convey the business’ broader strategy. Do the people in those teams truly understand what the decision makers higher up the organisation are trying to do with the business? What the plans are for that particular category, and can they articulate that to their suppliers?

“The danger is that, at a high level, the strategy agreed by the board gets lost in translation,” says Bocci. It could be that the strategic plan is to grow a particular customer group or be more competitive on price with those products, but if they can’t explain that to suppliers it makes negotiation far more difficult and hinders suppliers’ creativity. “Creativity isn’t magic,” says Bocci. “If retailers can’t explain their strategy to suppliers, suppliers can’t come up with a solution.”

Counsel each other

Frank, regular discussions about how each party is working will help iron out any performance issues and boost efficiency. Wallis says the easiest and most harmonious solution is to create a questionnaire that is distributed, say, once or twice a year.
All each party needs to do is tick the extent to which they disagree or agree with certain statements: ‘Are we good at sharing information?’, for instance, or ‘Do we prioritise opportunities to work together on innovations?’, and so on. “It keeps both parties thinking about the relationship as a relationship, rather than looking at the operational performance, and it provides a stimulus to talk to each other,” says Wallis. This approach allows both sides to identify the areas in which they should improve.

Think before severing ties

Done well, consolidating your supply base can cut costs, bring about a more refined and focused product offer, and lead to better supplier management because trading teams are more focused on nurturing fewer relationships with key suppliers. But there is also the risk of consolidation for consolidation’s sake. Retailers need to do what is right for each category.

Simply working to achieve a supplier reduction target number could lead to problems. For each category, retailers need to ensure they are delivering on price, consumer demand, are managing risk and have security of supply. The number of suppliers required to do that will vary from one category to another. “Only reduce complexity when you understand the needs of the shopper,” warns Bocci. He cites a case of one of the grocers: the supermarket removed a dairy product line altogether because the supplier wouldn’t budge on price. The grocer might not have valued the supplier, but its customers valued the product and were duly irked when they could no longer buy it.

One rule for one, one rule for all

While retailers need to prioritise certain suppliers, there also needs to be consistency with the general management style of all suppliers. Wallis says: “Even within an organisation people will have different ideas of a supplier relationship.”

One way to tackle this is through a formal supplier management programme. This helps prevent any mismanagement that might go on without colleagues’ knowledge. The very idea might make you want to groan. More bureaucracy? More time? Actually, it’s not as ominous as it sounds.

At a basic level it will set out day-to-day operational management standards and contract management - is it up to date and is it being adhered to? It can consider performance management and set key performance indicators that are measured regularly. For those suppliers who are a priority, it could also set out standards for strategic relationship management.