While historically buyers held much of the power in vendor relationships, the status quo is changing, and suppliers should not be afraid to negotiate with a focus on achieving benefits for both parties.
In a letter sent to vendors, Holland and Barrett outlined the need for stringent cost-reduction requirements of at least five per cent from all suppliers. As well as this, the high street giant wants suppliers to foot the bill for £3m worth of CCTV facilities and security tags for its products. Widely criticised by industry representatives as being ethically unjust, this approach is a blunt instrument which has the potential to remove value and quality from the business’ supply chain.
The tactic is more likely to make suppliers feel defensive of costs and unlikely to create a focus on eliminating wasteful costs between the two parties.
Price-squeezing initiatives are, on occasions, accompanied by an incentive for the supplier. For example, businesses may be open to accepting depleted payment per unit in return for a long-term commitment or contract from buyers. Similarly, price reductions may be agreed in exchange for better product placement in store, or enhanced marketing spend pledged by the buyer.
At present, Holland and Barrett’s justification for such tactics is that the firm has invested heavily in the opening of new stores and e-commerce, and as a result suppliers should enjoy an increase in sales. This claim may be true for some, but certainly not all suppliers, and vendors should see the firm’s demands as an opportunity to re-open negotiations in the pursuit of a better deal.
There are a number of concessions that suppliers could request when greeted with a demand to lower prices. For some, securing the promise of shorter payment terms may offset such changes by improving cash flow and financial stability. Alternatively, agreeing on a scaled payment system based upon the volume of products sold in store may prove mutually beneficial and allow Holland and Barrett to demonstrate confidence in its growth forecasts. Such an approach, which would vary by supplier, may allow even greater savings to the benefit of both parties.
In general, resorting to blanket requests should be avoided altogether, and demonstrates a poorly-executed and short-sighted procurement strategy. Buyers and suppliers should work together to reduce waste and lower risks, removing non-value adding processes from the supply chain. Doing so allows the considered and collaborative streamlining of the firm’s supplier base, reducing the likelihood of a drop in product quality.
When examining supplier contracts, it is vital that buyers do not implement a “one-size-fits-all” approach to cost reduction. In order to prevent this, suppliers must take the lead and create an open and honest dialogue in order to justify the value of their product. A transparent analysis of market conditions, raw material costs and any changes to the regulatory environment should be produced in order to demonstrate the likely impact of external forces on the business. This information will then provide an empirical basis upon which a dialogue can be opened, with that dialogue focusing on cost, rather than price.
Above all, small businesses must be prepared to fight back when issued with blanket demands from larger buyers. Increased market competition and the rise of the online marketplace have handed vendors more power, and the freedom to sell their product through a variety of different channels. Possessing the confidence to negotiate with buyers is essential if business relationships are to prove fruitful for all and product quality is to be maintained.
Roy Williams is managing director of procurement and supply chain specialists Vendigital.
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