Tuesday 18 June 2013

Managing the post-rescue Booker-Makro relationship..

As one of our most popular NamNews items yesterday, reports in The Grocer of alleged demands by Booker from suppliers for lump sums/terms-harmonisation raise issues for suppliers.

It may be worth running through your financial options rather than resorting to simply saying ‘no’ and possibly jeopardising a potentially productive relationship..

No one expects you to simply give in to every request for additional monies, but being able to explain ‘why not’ can perhaps build your status in the relationship, leaving the customer to pass on and try a less-skilled supplier further down the line…

Essentially, if you are in the business of fair-share defensible dealings with customers, then anticipating and managing demands for correction of pricing and terms disparities following a merger of two customers will be part of your regular routine, using your normal tool-kit.

However, given the unprecedented times, a reminder of the process when two customers combine operations, may be of value:

Your business relationship with a customer will have the following ingredients
- Gross Margin on sales by the customer
- Credit period
- Settlement discount
- Trade funding
- Deductions

Gross Margin:
This should be the same for all customers that perform the same/similar function in re-selling your product. If different, it would be wise to clarify and be able to justify the additional services provided by the customer that enjoys the larger trade margin. Inability or unwillingness to do so will inevitably result in forced harmonisation upwards, or even de-listing. Handling the issue properly could result in the newly-combined customer adopting the additional services across the business.

Credit Period:
It is a no-brainer that a newly merged customer will want the same credit-period as its new partner, and if a defensible rationale does not exist, expect a demand for harmonisation to the longer credit period, with possibly a two-year back-haul ‘to recover the benefit we would have enjoyed’….  It would be unwise not to have calculated the cost of credit in advance for each of the customers and worked out the impact of ‘harmonisation’, before the customer asks…

Settlement discount:
If you operate a settlement discount to encourage early payment, hopefully it will stand ‘like-with-like’ comparison between the two customers…?  Ideally the discount will pay the same rate for the same reduction in payment periods. Why not check it out on our settlement discount tool and work out the inevitable customer demand in advance, rather than in the heat of a ‘demand’ session?

Trade funding:
If, like most suppliers, you operate 20-25 trade-funding ‘buckets’, it would be wise to check out ‘who gets what, and why’ for each of the two customers, quantifying cost to you and value to the customer in each case (our latest version of NamCalc covers 33 trade calculations). In practice this means working out the incremental sales required by the customer to generate the lump sum equivalent to what you give in trade funding…i.e. a customer with a net margin of 3% needs incremental sales of £33k for every £1k you invest in their business… (£1000/3 x 100)

These depend on service level, contracts and the ability of the customer to measure  and claim for real loss.
Best to clarify your options ‘just-in-case’ and if tempted to procrastinate, remind yourself that in the US, deductions can represent up to 7% of a supplier’s sales…

‘Lump sums for rescuing Makro’:
In taking over Makro, a commercial decision was made within the normal constraints of the takeover process i.e. it was not possible to consult with suppliers in advance, so presumably all costs were factored into the agreed price at a known level of risk that did not include incremental help from suppliers….  In the same way, as Makro drifted downwards, most suppliers will have assessed the risk and cost to them of the company going bust and will have factored this into their trade strategies.

Only if the takeover of Makro results in genuine incremental business for the supplier, will additional payments be negotiable…

A supplier that has completed the calculations outlined above will be better prepared than most to handle the resulting session with Booker…

[Incidentally, if you have not had a request yet, it may be because of your position relative to other suppliers on the radar…. So a 'what-if' on the above options may be worth a moment of your time?
If you are stuck on any aspect of the application, why not give me a call?]

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