Showing posts with label fair share dealings. Show all posts
Showing posts with label fair share dealings. Show all posts

Sunday, 10 March 2019

Fair-Share Trade Relationships: How to optimise via equal compromise...

NAMs that manage to achieve fair share realationships with buyers can keep it so by focusing on the following 'rules':

Keeping the Deal in Place…
An ongoing Trade partnership requires that both parties respect the basic deal. In other words, over time they have reached a balance of risk and reward that satisfies the needs of each party. All further moves will take place on a reciprocal basis whereby a demand by one will be matched by a gain of equivalent value by the trade partner. Otherwise, the relationship becomes so one-sided that the partnership breaks down and each side loses. Systematic use of financial measures can help in optimising trade partnerships and provide a more reliable balance of risk and reward.

Corporate Customer Portfolio Role
Essentially, the process starts with establishing the customer’s role within the corporate customer portfolio, in terms of current and target Sales and Profit, lifecycle profile, and investment classification (invest, maintain or divest). The main focus can then be on achieving target sales and profit, only referring back to corporate performance when target sales and profit performance s deviate from that target.

‘Deal on the Table’ a constant benchmark
Here the customer and supplier are placed in market context, reflecting relative power in the relationship.
  • Customer’s share of the supplier’s business (£ sales, %)
  • Supplier’s share of the customer’s business (£ sales, %)
  • Customer’s share of the category in total market: their appeal to the supplier’s competition and importance to the supplier
  • Supplier’s share of Customer’s version of the category
  • Size of deal for supplier (£, %) in this case current and annual target sales and profit (Gross and Net), reflecting scale and risk of loss of the business within supplier’s customer portfolio
  • Size of deal for Customer (£, %) current annual and target sales and gross profit, reflecting Customer’s level of dependency on supplier
Current Terms and Conditions in the relationship
The supplier, operating on the premise that everything can be reduced to a financial cost and value, calculates the cost of each element of the relationship and the incremental sales it represents for each party. This includes credit period, settlement discount, stock levels, promotional support and all other parts of the supplier’s total offer package. The same terms and conditions should be translated into customer’s sales equivalents, using the customer’s published net margin as a multiplier. This will help to establish and demonstrate the value of the supplier to the customer. 

Maintaining the ‘status quo’
This total offer package represents the basic working relationship in terms of relative risk and reward between the two parties. If both parties seriously value and want to maintain the relationship, then any additional request or change in the deal by one party, will require a reciprocal move of equivalent value in order to maintain the equity of the business relationship, in other words, the ‘status quo’.

In practice this means that however the circumstances of either party may change, any such change and the resulting demands should be costed, valued and the results factored into the total offer package in order to ensure that parities have been maintained, and the supplier will continue to invest in the relationship.

Specifically, the implications of any new, ‘incremental’ or arbitrary demand or breach in compliance should be explored fully in terms of its impact upon the rest of the deal, and agreement reached on appropriate adjustments to the total offer package. Any reluctance to explore such options on the part of the buyer should be treated as an attempt to achieve an incremental gain at the expense of the supplier, and resisted.

Finally, it is obvious that this level of trade relationship relies heavily upon mutual trust and willing compliance. It is a deal between two organisations equal in respect for one another, if not in scale, and by definition has to operate on a multilevel and multifunctional basis, capable of surviving regular buyer-churn and fundamental changes in the market.

Otherwise, we are all in more trouble than we realise….

Feedback: ‘everything in a supplier-retailer relationship can be reduced to a financial cost and value’ We welcome any feedback quoting exceptions and will try to illustrate way and means of calculating cost and value. Please contact me with your exceptions and comments via Linkedin, or at

Wednesday, 7 October 2015

Tesco's new trading terms - a fundamental step towards fair-share dealings?

In an issue-packed day where most delegates had cause to re-set their business priorities, and test the limits of their networking skills in a pool of 650+ potential contacts, the IGD’s Big Debate presented a fundamental opportunity to update suppliers’ UK market context with the help of speakers that were prepared to face up to market realities and indicate their ways forward….

Nothing beats hearing it live, but a good second best (apart from a lost networking opportunity) can be achieved via a combination of the IGD’s Events App and reports from a packed press gallery.

Although spoilt for issue-choice, for me a pivotal item was Dave Lewis announcement of Tesco’s new trading terms.

Full details here, but essentially, Tesco has pledged to deliver a simpler and “fairer” business model for suppliers, by standardising their payment terms and settling bills from small and medium-sized firms quicker. 

When you consider that Tesco’s average days credit period is 42 days, which at say 5% cost of money and trade creditors of £5,076m (end Feb 2015), is worth £253m per annum, you will appreciate the pain this represents, given this morning’s announcement of a 55% fall in profits to £354m.

Whilst the new terms represent a major step towards fair-share dealings for Tesco – and a pointer for other retailers? - this is hopefully but the first move in acknowledging that trade credit should not be regarded as a source of working capital, but merely a way of covering a cash-flow gap between supply of a product and receipt of cash from a shopper. 

If that is the case, then Tesco need to budget for an eventual move to approximately 5 days average trade credit…

If this initiative catches the imagination of the public and thereby contributes to Tesco’s recovery, then other retailers will have to follow suit, or suffer loss of share…

However, whilst this will undoubtedly help suppliers, the real consequence will be the public-opinion spotlight then turning on major suppliers’ use of up to 90 days free credit from their ingredients, packaging and services suppliers…

Time for all suppliers to anticipate the obvious and begin their profit re-sets now?