‘We are all special cases’ *Meeting a Buyer’s Need For Special Treatment in 2012.

Given current pressures in the market, coupled with a tradition of attempting to meet a buyer’s needs, the new Age of Selfishness can mean that more ‘powerful’ buyers get more than their fair share, in effect making the strong players stronger…

Unless it is your company policy to eventually end up with one customer, it is important to attempt to meet a buyer’s needs within a context of all other buyers’ requirements. In other words, we need to balance resource allocation across the whole customer portfolio to avoid distortion of our consumer base.

Our starting point has to be our own survival in terms of an acceptable ROCE and Net Profit in a flatline growth environment, over the next five years, at least.

Realistically, this means achieving at least 15% ROCE and Net Profit of 10% for our company and for our business with each of our major customers, minimum…

There are two ways of achieving this, either growing the business, or cutting costs. Given the lack of growth, this means cutting all available slack in the system in terms of stock level vs. service level, trade terms and making trade funding investment conditional upon full compliance.

This exercise will help calculate the size of the ‘cake’ available for the customers, divided in proportion to their potential turnover within our total sales performance and profitability (i.e. ROCE and Net Profit).

Given that our competition are under similar pressures an probably fighting for their lives (and perhaps do not even know it), it is crucial that we maintain a realistic view of our competitive appeal vs. others in the category, and again cut away anything not demonstrably contributing to that appeal.

It is only then that we can consider a buyer’s need for special treatment, counting cost and value all the way..

Welcome to 2012…

*Albert Camus

Debenhams early payment of suppliers’ invoices - how to calculate a fair share settlement discount?

According to the Financial Times, Debenhams has been allegedly offering suppliers earlier payment in exchange for a discount on their invoices, a process adopted by some other big retailers. It appears that its supplier terms can be up to 120 days, although people close to the company say it also has suppliers on 30-day payment terms.

Successful negotiation of a fair-share discount off invoice is possible using the following process:

Say, annual Invoiced sales to the Customer = £9.5m

Customer now pays in 90 days

We want him to pay in 42 days

i.e. a 48-day reduction in payment period

Customer now pays       4.06 times per year i.e. 365/90              

We want him to pay       8.7 times per year i.e. 365/42                           

Amount he owes us when paying in 90 days

                                                = £9.5m/4.06 = £2.34m

   

Amount he owes us when paying in 42 days

                                                = £9.5m/ 8.7  = £1.1m

                                                    

Therefore the cashflow saving = £2.34m - £1.1m

                                                = £1.24m

Say the cost of borrowing is 10% interest per year

Therefore the cost of borrowing £1.24m for a year

                                                         = £0.124m

Which is equivalent to 1.3% of sales

                                          i.e.  £0.124m/£9.5 x 100%

                                   

Therefore any extra discount above 1.3% is attractive to the customer (or should be….! )

This discount is the most you should offer for a 48-day reduction in payment period!

(To tailor the calculation to your company-customer relationship, simply substitute your figures for sales, current payment periods and desired payment periods)

Incidentally, why stop at 42 days credit, a credit period in which a lot could go wrong?

In fact given the current state of the Euro-manoeuvres, we could soon enter an environment where selling to customers for cash becomes the only safe option…..!

Buyers are what we make them?

….over 200 retailers analised* to discover…

A chance typo today in an email from a researcher pal of mine raises the thought that perhaps a supplier’s treatment of buyers over the years has caused them to regress to a more primative stage in their negotiation behaviour?....

…or perhaps not?

* Anal: a stage in psychosexual development when the child's interest is concentrated on the anal region; fixation at this stage is said to result in orderliness, meanness, stubbornness, compulsiveness, etc.

Prompt Payment Code - the great misnomer!

News that Primark have joined Asda, Tesco and John Lewis in signing up to the Prompt Payment Code misses the essential point of the current use of supplier credit as a free source of Working Capital by the major multiples. Apparently Sainsburys, Morrisons and Boots all appear to agree with the code, but are considering their options…
As you know, the prompt payment code specifies that retailers should pay their suppliers within the credit period agreed between the two parties.
Any business failing to pay within terms agreed with suppliers would be in breach of the code and would risk being struck from the list….a good idea going nowhere!

How about Fair Payment Code?
In the fast-moving UK grocery & nonfood industries, with daily deliveries and average supplier credit-periods of 30 days, and H&B/Non-foods reaching 90 days, 'prompt' is hardly an accurate description of current payment periods.
More importantly, a supplier in financial difficulties neither has the muscle to negotiate earlier payments, nor can afford to offer sufficient settlement terms to encourage a reduction in days' credit. Besides, in most circumstances, a supplier will still be reluctant to risk reporting a major customer for breaches of the code.

If the government really wants to bring about change, it needs to appreciate that credit period given by suppliers was originally intended to help a customer bridge the gap between receipt of the goods and payment by the shopper. In the current UK market, with stockturns averaging 25 times per annum, but in some categories turning daily, or at least twice per week, surely payment period should be related to delivery frequency?

In practice this means that fresh produce delivered daily, should be paid for within 5 days, allowing for 'efficiencies' of the current Banking system?
Non-foods, delivered weekly, should perhaps be paid for within 10 days of receipt.

Relating credit period to delivery frequency would reward efficiencies on each side, and would shift the emphasis off free credit as a source of working capital. It would also remove much of the political sensitivity attached to potential charges of abuse of power by the major multiples...

(For those who need it spelling out, which major multiples do you think will get the blame for all the supplier bankruptcies arising from the current recession, as the government and the public cast about for a scapegoat in the coming months…?)

However, simply imposing a category-based credit period, and legislating to reduce to those levels is not the answer.

Current credit periods have developed over time and represent an agreed balance between supply and payment between two business partners. A one-sided reduction of the credit period would be unfair to the retailer.
What has to happen is for each party to agree the financial advantage represented by the current credit-period and calculate the loss to the retailer represented by paying faster.
This loss could then be restored via other parts of the supplier-retailer package, thus maintaining a fair-share trading relationship.

How to Say "No" to the Buyer

During negotiation, especially in the current climate, the ‘give and take’ environment can make it difficult for the seller to say "no" to impossible requests (i.e. requests for over-rider, settlement discounts) if these are against company policy.
A simple refusal may set the negotiation session back and undo any progress already achieved.
On the other hand, any lack of decisiveness may be interpreted as providing scope for possible movement.
Signalling, both verbal and non-verbal (body-language), should be used to reinforce the message. The buyer may even be tempted to try to sidestep the KAM and open negotiations further up the organisation.
In this case, line management obviously needs to echo the KAM’s stance and direct the buyer back to the KAM as manager of the account. Again, any lack of decisiveness merely encourages the buyer to attempt to maintain a dialogue with sales management on a permanent basis.
In dealing with impossible requests, the basic approach is to say outright that no movement is possible, and then explain ‘why’. It is essential to make it clear via signalling that your willingness to explain should not be interpreted as possible flexibility.
Namnews subscribers can find some worked examples here.

Prompt business payment can benefit the buyer as well as the supplier?

A recent letter to the Telegraph by Institute of Directors, Forum of Private Business, Confederation of British Industry, British Chambers of Commerce, the Institute of Credit Management, and the Federation of Small Businesses, lists possible financial benefits throughout the supply chain in making prompt business payments.
'Prompt payment helps establish the best customer-supplier relationships, and enables customers to negotiate better deals and avoid late-payment interest charges. Prompt payment gives a signal to the market of confidence and financial wellbeing that in turn promotes further business opportunities and growth'.
Unfortunately, we believe that the letter misses the point, especially within the retail sector.
In our opinion payment terms are about power and need. Power comes from relative sizes of supplier and customer. In other words given the size of a major customer, accounting for 5% or more of a supplier's business, a supplier has no alternative but to await payment in an agreed period, and succumb if a retailer decides to to extend that period, or forgoe the business. Given that trade credit is an interest-free loan given to the customer, and a status quo has been established (say 30 days) then a retailer is unlikely to pay earlier without a concession of equivalent value in exchange.
Essentially, a retailer has three choices: invest money in a new store, deposit it in a bank or pay a supplier. The supplier simply has to demonstrate that their offer of an early payment discount exceeds the retailer's other two alternatives in order to secure earlier payment.
The only other possible approach is for the supplier to represent a niche market via a product that the retailer 'needs' to an extent that the retailer is prepared to compromise on their normal trading terms… Even then the supplier has to be watchful that competitors are not attracted into their niche area, thus weakening their 'solus' advantage… (Use our Buying Mix Analysis tool to assess the risk)
Unfortunately, awaiting help via government intervention requires a degree of lung-capacity beyond the capacity of most real-world suppliers…

Creditworthiness may be linked to looks?

In this New Age of Uncertainty, KAMs should perhaps forget historical behaviour and resort to prolonged (unblinking ) staring at the buyer to anticipate possible payment issues. According to the research, shy KAMs could request a photo and achieve equivalent results by studying the buyer's portrait in the privacy of their home, partner permitting…