Wednesday, 14 June 2017

Making the Numbers Count at the Supplier-retailer Interface…

Operating at the financial edge needs real-number usage by finance-savvy NAMs.

Given the continuing global credit-squeeze and the resulting slowdown in UK retail, account management will have to be played very close to the financial edge for the remainder of 2017…  This makes it crucial that suppliers quantify and demonstrate key aspects of the risk-reward relationship at the supplier-retailer interface.

Creative use of numbers can help.

However, whilst robust calculating methods can often reveal usable insights, the confidence and ability to lead a reluctant buyer to ‘obvious’ conclusions requires a little more… Working confidently at the financial-edge requires a constant willingness by NAMs to reduce issues and situations to numbers, to the point that the resulting moves seem instinctive. This means building up a repertoire of calculating-tools that can be adapted to most aspects of a trading relationship, and by continuous application, internally and with the customer, a level of confidence and credibility is built up over time.  

Essentially, optimising the supplier-retailer relationship is about working towards and maintaining a fair balance of relative risk and reward between trade partners. It is crucial to understand both supplier and retailer business models in terms of how money works within each organisation, using latest open-domain accounts as a basis for comparison.

This means isolating every type of financial transaction with the customer, calculating its cost to the supplier, and then its value to the customer based on respective business models.

In other words, a supplier making a net profit of 9% (!) has to achieve incremental sales of £11.1k for every £1k ‘trade -invested’ with the customer. Meanwhile, a retailer making a net profit of 3.5% has to generate incremental sales of £28.6k to generate that same £1k received from the supplier. Thus it can be seen that a £1k investment by supplier is ‘twice as valuable’ to Sainsbury’s (net profit 1.9%, incremental sales of £52k) than to Asda, with its net profit of 4.4%, incremental sales of £22k, thereby requiring differing levels of emphasis and support in negotiation.

In this way, it is possible to use incremental sales as a measure of the value of trade funds investment to the retailer, thereby impacting two important buyer KPIs, margin and sales growth. In practice, the buyer is measured on gross margin, but is increasingly affected by the resulting net margin as a driver of ROCE and ultimately the share price.  

Apart from helping in day-to-day negotiation, working the latest numbers at the supplier-retailer interface is really about identifying relative risk in the total pipeline, and allocating rewards appropriately to all members of the demand-supply chain. Because of a reluctance or inability to factor in different parts of the relative remuneration package over the years, the risk-reward balance has become tilted in favour of the retailer. This means that gross margins, and credit periods currently enjoyed by retailers do not reflect improvements in delivery frequency over the years.

This additional insight added to average payment periods of over 40 days, coupled with daily delivery, means that eventually, an indefensible and politically damaging position will emerge. In other words, whilst the recent moves to pay smaller suppliers in 14 days are encouraging, it would be beneficial to extend this to all suppliers as part of a move to more of a fair share, reward-for-risk model.

Counting the latest numbers can help in achieving this balance… 

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