Thursday 29 September 2022

Open-Book Accounting, Post Lockdown

UK supermarkets agreeing to ‘Open Book’ deals with suppliers amid an energy crisis can be a step forward in terms of supplier-retailer collaboration. Patently the root cause/s of this development are far more complex and threatening than an unanticipated hike in the price of energy.

In fact, what we are currently witnessing is the latest stage in a process that kicked off with the 2008 global financial crisis, when the cost of consumers bailing out ‘banks that were too big to fail’ began an era of low inflation and interest rates that was used in an effort to stimulate demand. The resulting and excessive ‘quantitative easing’ or printing of money caused a build-up of debt whereby a global shock was required to attempt to re-set global economies via a 2.5-year series of Lockdowns.

As markets recovered unevenly, imbalances of supply and demand resulted in soaring inflation affecting fuel/energy, supply shortages, and changes in shopping patterns, all causing chaos on shelf.

Suppliers and retailers have now been pitched into each other’s arms with the aim of collaborating or die…

Open Book Accounting (OBA) is but one aspect of this new level of partnership. In fact, NamNews quoted trade magazine The Grocer in reporting recently that industry experts are calling for supermarkets to work more closely with suppliers to prevent the energy crisis from causing food shortages.

Sources told The Grocer that some retailers were taking a collaborative approach and agreeing to so-called ‘open book’ deals. For instance, this enables both sides to track suppliers’ energy bills and take them into account during cost price increase negotiations.

At its simplest level, OBA is a ‘safe’ business practice where a company shares key financial information with stakeholders such as funders, clients, suppliers, investors, or contractors.

However, whilst ‘opening the books’ can be a major cultural change for many companies, extreme times require extreme measures, and when introduced in highly competitive retailer-supplier environments, there can be consequences…

Essentially an OBA relationship embraces a mix of Commitment, Focus, Trust, Integrity, Effective Communication, and a determination to work collaboratively in solving problems-in common. All in a highly stressed and uncertain environment where trust is paramount.

On the plus side, benefits can include:
  • New levels of collaboration between retailer and supplier
  • Resulting financial transparency improves performance
  • Members of supply chains can benefit from less overlap and costly buffering
  • Working capital usage can be optimised by relating invoice settlement to shorter, more efficient order cycles
  • Can provide a trustworthy basis of actual costings that reflect the true risk and effort for each party, minimising the need for second-guessing
One way of ensuring delivery of these benefits is for the partners to work to a P&L-in-common (see below).

Potential downside impacts of OBA can include:
  • OBA requires a massive cultural change in each organisation, top to bottom
  • Use of skills unavailable in-house e.g. independent auditors (cost, delays, objectivity)
  • Degree of detail required can be information and resource-intensive
  • Requires openness, trust and transparency that will take time to develop
  • Increased job-mobility increases the risk of information-leakage

It is hopefully obvious that OBA depends on the establishment and maintenance of long-term working relationships, especially in an environment where retailers often see rapid buyer job-rotation, sometimes six-monthly, as a way of minimising the close NAM-Buyer working relationships that make it difficult to negotiate tough deals with people you like…

In terms of NAM and Buyer, OBA obviously raises a number of issues for each party:
  • A supplier has direct experience of their brand cost structure in a given category
  • A retailer could have access to all brand costs of all category members (i.e. optimum methods of production, methods and ingredients combination)
  • Risk of incremental growth of own label at the expense of brands, via the use of brand-production insights
  • Global suppliers and retailers will have access to differences in fuel/energy prices/increases in different countries (distraction at local level especially given the relative lack of pointers in mainstream media)
Ways of optimising an OBA relationship in practice
OBA needs high degrees of trust and collaboration in supplier-retailer relationships, given that its effectiveness requires that partners share data and financial information about costs incurred in every part of the supply chain. Both parties can use this insight to ensure that costs are kept low, without compromising other aspects of the joint supply chain.

Confidentiality is a must-have, but realistically, if both parties continue to derive more benefits from collaboration than the quick hit of exploiting business secrets, there is a reasonable chance that leakages will be kept at manageable levels. Nevertheless, pragmatists on either side are unlikely to forget who is on the other side of the table…

Also, in most organisations, there will be ‘trade secrets’ that will never be opened up to anyone, even the company’s local management, let alone second or third parties… This can often take the form of the ‘magic ingredient’, a formula handed down from the owner’s great-grandparent and now securely locked in a bank vault overseas, often in a low-tax environment like Switzerland. This vital ingredient, with a transfer price designed to syphon off profits from overseas subsidiaries, ensures that corporation tax obligations are kept manageable, even in unprecedented times...

In terms of day-to-day negotiation, given the benefit of OBA and their ‘open’ access to much detail in the joint supplier-retailer business, time normally spent on adding value to concessions, devaluing concessions from the other party, and explaining/excusing our inability to comply with impossible requests or enter no-go areas, energies can be redirected to joint exploration of mutual gain. Using real data, with less time needing to be spent on validation, results can be tracked via the joint P&L. In other words, Buyer-NAM time can be more productively spent on the ‘How?’ rather than ‘Why?’ of dealing with joint trading issues, hopefully to more effect.…

Moreover, in terms of individual negotiation sessions, the Size of the Deal on the Table can be quantified quickly, allowing a joint placing of the session in context using real data:
  • Customer’s share of the category?
  • Private label share of category?
  • Our share of their business (£, %)
  • Our share of their category (£, %)
  • Size of the deal for them (£, %)
  • Size of the deal for us (£, %)
Choosing the right partner
Given the risk of OBA going wrong, especially in the current climate, it is vital that extreme care is taken in choosing the right Invest customer. In other words, OBA should only be considered for customers meeting the following criteria:
  • Potential (Immediate importance, life-cycle, market share)
  • Partnership (Strategic alignment, relationship possibility, cultural fit, consumer match)
  • Profit (Share of profit vs. share of sales)
  • Performance (Relative competitive advantage within the customer, share of category)
The results of this new level of risk-taking needs to be captured in an enhanced customer account management tool, as follows:

Customer Account Profitability impact (A P&L-in-common, sharing the net profit before tax in proportion to relative risk)

Given current crisis conditions in the market, desperate measures like OPA are required… Obviously, it cannot and will not be applied to all customers, but it can be a very effective basis for deeper relationships with Invest partners.

We are going to have to share what has always been confidential, and as you know it is always easier to be truthful than to add the extra pressure of having to lie consistently… Providing we take normal business precautions, and a customer meets the other criteria for Invest-Customer status outlined above, it may be worth considering this ultimate step in measuring the financial relationship, a P&L-in-common.

Essentially, this means extending our Customer Account Profitability model to use shelf price as the starting point, then adding in all retail costs to arrive at the supplier selling price, less all manufacturing and distribution costs, a percentage of national advertising & promotion related to the size of customer, and itemising all trade investment/funding for this customer, including retail media.

This leaves a joint net profit before tax to be split between supplier and retailer according to negotiated agreement of relative risk for the two parties. The joint P&L thus represents a final measure of each party’s trust in the costs and value of the amounts involved, the ultimate measure of fair share!

OBA represents a major breakthrough in supplier-retailer relationships, with trust as an essential bedrock, but in the new norm, there are few other real options.

Unless you prefer to return to the good old days of Them and Us…?

No comments: