As a supplier to a large supermarket, how do you ensure your business is not put under strain from unreasonable demands – and what do you do if it is?
Duncan Swift heads up the food advisory group at accountancy firm Moore Stephens and is a national recognised expert in supply chain matters who was consulted for the Competition Commission’s groceries market review. He gives his advice.
Over the last 20 years I have assisted hundreds of financially challenged agriculture, horticulture and food processing businesses.
Unreasonable demands from supermarket buyers was the underlying cause of the financial distress in about half of the cases. These demands included:
- Incorrectly applied retrospective volume rebates (over-riders)
- Unexpected requests for listing fees and contributions for marketing and promotions
- Unannounced deductions from payments for shortfalls in meeting service obligations (for example, on quality, over/under volume, delivery timing), wastage, damaged goods, returns and similar
- Lengthening supplier payment terms (to as much as 120-180 days) giving the retailer more working capital for its own business and providing a bigger fund from which it can deduct supplier contributions from money owed
- Over-ordered short-run promotional goods to sell the excess at full price
- Short notice for order reductions or cancellation and for product/supplier delisting.
If you supply a retailer, making the effort to ensure the terms of trade are reasonable will increase the security of your business, particularly if the retailer is a key customer.
To help you do this, there are some additional tools – a beefed up code (the Groceries Supply Code of Practice) and the Groceries Code Adjudicator – which while not perfect (indirect suppliers are not covered for instance) are a significant improvement on what was previously available.
Combining this improved governance position with the following actions can help protect your business.
1. Be realistic
Fair dealing is not about price, it is about the certainty that the supply price you have agreed with your customer is paid after you have made delivery. If the supply price offered was wrong in the first place, there’s no one else to blame but yourself.
2. Know your limits
Get the supply price right – identify market comparable prices, the minimum expected contribution by product and the overall contribution you expect from the customer.
If the customer then offers an unacceptable price, it is not unreasonable to offer alternatives or ultimately to say “no” and respectfully end the negotiation.
3. Maintain good records
Many arguments with customers over deductions from payments are lost because of failings in supplier records.
Critically a proof of delivery (POD) must be obtained for every supply and immediately checked for accuracy, especially if PODs are managed by third party warehousing or haulage companies.
4. Don’t be a sitting duck
If you file accounts showing reasonable profits with cash sitting on the balance sheet your customer will know and may come knocking for more “supplier contributions”.
To protect against this, take advice (e.g. from your accountant) about how to designate cash that’s committed to future investment. Or put it into a separate company (owned by you still), which can carry out that investment when you are ready.
5. Spread your risk at all levels
Seek to avoid over-reliance on any customer, supermarket or otherwise (over-reliance starts at 20% of sales). Have a “Plan B” route-to-market identified to cover the risk of your main customer pulling out or substantially reducing its order.
6. Know your customer
And if they are an indirect supplier, know your customer’s customer. How well do you know their terms of trade?
How reliant are they on any one of their customers? What is its financial covenant and ethical quality, and who are their customers if you’re an indirect supplier?
7. Know your rights
Direct suppliers can go to the GCA in confidence, but indirect suppliers will also be heard if unreasonable behaviour from a retailer has travelled down the supply chain. Make sure you are familiar with the groceries code (GSCOP) and the remit of the GCA.
8. Watch out for evolving malpractice
We’ve recently helped suppliers with:
- Unexpected demands from commission agents acting on behalf of customers for alleged overpayments going back six years. Note that the adjudicator has obtained agreement from most major supermarkets to only look back over the current year and prior two years.
- Increased requests for suppliers to use specific sub-suppliers (for example, packaging), who do the customer’s bidding at your cost.
- Customers sharing the supplier’s know-how and business plans with direct competitors.
9. Do not accept sporadic maltreatment
It’s a slippery slope. Manage an exit or fix the relationship through the customer’s written acknowledgement of the incident and assurance it won’t happen again.
10. Seek an independent view
Finally, while we’re all busy, it is important to regularly discuss and reflect on your customers’ buying behaviours with a trusted adviser. If they think something’s unreasonable, it most likely is and you should tackle it.
Legal advice on managing retailer relationships
Dominic Higham is a dispute resolution specialist and partner at Clarion Solicitors who has advised government and the private sector.
Irrespective of the size of the company or operation, the following general practices can be implemented to protect the business when dealing with retailers or other large customers.
- Be clear on your obligations – a written contract is best, but letters, emails or a discussion can also be binding on the parties, so keep good records, including of conversations
- A written contract should mean that the obligations are set out more fully and clearly, avoiding uncertainty or ambiguity
- Understand your customer’s standard terms and impose your own if possible
Rights and obligations:
- Keep track of your rights and obligations – it’s not much use having a contract which is never referred to such that the parties’ contractual behaviours quickly depart from what was agreed
- Properly manage the contractual performance and relationship If you are making concessions with, say, reduced deliveries, understand the extent of those concessions and document them so that there is no misunderstanding as to their duration or basis
- Do not waive your rights by allowing under- or different performance to continue unchecked without clarification
- Where contractual performance falls below what is expected, take this up with the customer promptly. Use contract escalation or dispute resolution procedures to resolve matters if needed
- If there are issues from your side, address these early to avoid matters deteriorating
- Take advice early. If necessary obtain assistance with effective contract management to help minimise the dispute, ensure that your position is protected and give you the best position if a larger dispute arises