Showing posts with label risk. Show all posts
Showing posts with label risk. Show all posts

Friday 15 August 2014

Is your customer worth a 90-day wait?

Although you could exercise your ‘walk-away’ rights, we all know that a customer representing 10%+ of your business is not easily replaced, especially in a flat-line environment…

The issue is whether you need to reduce the payment period to reduce exposure, i.e. the risk of a customer going bust, impact on cash-flow of an extended credit pipeline, or simply on principle i.e. a deeply-felt determination not to shoulder the working capital responsibilities of even your best customer..

If the issue is one of company principle, then the Board must be prepared to take the pain of de-listing, with the NAM simply becoming the messenger who hopefully survives the ‘walk-away’ trip…

Ordinary mortals need to focus on the cost of risk-reduction and minimising cash-flow impact…

The ‘on-time payment’ blind alley
Incidentally, forget the regulation/legislation re ‘on-time payment’. As you know, this simply states that the customer ‘must’ pay within the period agreed, be that 30, 45 or even 90 days. ‘On-time payment’ is not about paying within a defensible time-frame i.e. say 10 days for a daily-delivered product that is sold within 5 days of receipt…

In other words, if a supplier is not paid on transfer of value, i.e. when the goods are sold to consumers, then, by definition, the supplier is providing extra value in the form of interest-free credit, and this should be factored into the supplier-customer equation…

What to do about it?
Whilst you may not be successful in negotiating a reduction in payment terms, it may be possible to approach the problem in a different way i.e. via compensating concessions.

How to do it?
Having calculated the cost of financing the current credit period (NamCalc), say 65 days, vs. the cost of the ideal reduced period, say 30 days, then the 35 day difference will be the amount the supplier needs to recover from the relationship via a combination of additional low-cost, high value concessions from the buyer...

These could include ‘last-minute’ extra facings to fill unexpected gaps, temporary exclusivity, and ‘free’ use of space for in-store theatre-promos ( the mults have increasing issues with redundant space).

In order to be able to agree a fair exchange of a combination of these concessions for credit period, it is important for the NAM to be able to calculate or at least estimate the incremental sales that can result from the each initiative, never forgetting that every move creates a precedent…

The key idea is having the courage to put credit period in the middle of the table, quantify it from each party’s point-of-view, and explore different options with the buyer that may go some way towards re-balancing joint value..

Simply regarding credit-period as a fixed norm not only misses a negotiable trick, but also represents increasing risk in the current climate… 

Wednesday 4 December 2013

Managing uncertainty amidst the chaos

At a time when Tesco looks worse, Sainsbury’s are racing back to former glories, Boots, a basket-case only a few years ago but now looking global, Lidl stocking lobsters, and a virtual collapse in demand-growth, most NAMs could be excused for wanting to await a settling down in the market and the emergence of familiar patterns….

However, proactive NAMs know that the ability to cope with the current conditions determines real success in account management.

In other words, treating a flatline market as normal, and factoring risk into trade strategies has to be a way forward.

This means acknowledging that any growth has to come at the expense of the competition, requiring competitive profiling via a buying mix analysis.

It also means facing up to ‘permanent uncertainty’ by conducting a risk analysis for key options and initiatives. In practice this means exploring the impact on the business (high, medium or low), and chance of occurrence (high, medium or low) and developing contingency plans where things going wrong have high impact or a high chance of occurrence, or both.

Uncertainty can then be recognised for what it is, merely a stage in market development…    

Wednesday 20 March 2013

Knowledge of football is a myth in sports gambling success

In a new study of football forecasting, the researchers compared the betting results of three groups of participants, including 53 professional sports gamblers, 34 soccer fans who were knowledgeable about the sport but had never gambled, and 78 non-gamblers with no prior knowledge of football at all. All participants placed bets on the final scores of the 16 second-round matches of the Champion's League, organized by the Union of European Football Associations.

No difference was found in the results of the most experienced sports gamblers, the most knowledgeable football fans, and the totally inexperienced. Two of the least knowledgeable actually made the most money betting....!

How does it affect the NAM?
Given that NAMs often have to take a ‘leap in the dark’ when dealing with major customers, like forecasting coupon-redemption rates in uncertain times, the role may sometimes feel like high risk gambling. In other words, it may seem that playing by ear can be just as successful as a deep understanding of the customer when predicting outcomes…, according to the football research above.

What makes the NAM role different?
In practice in the NAM role, we need to distinguish risk-taking and gambling. Risk-takers would not pass a car on a hill or a curve, nor blindly go into a business venture. They assemble the facts and evaluate carefully from every possible perspective the chances of success and the benefits which go with that success.  They understand  there are no guarantees and that the possibility exists that they could lose (Zigler/Sully).  Nonetheless, they recognise that the possible gain is so much greater than the possible loss that they deem it appropriate to take the risk.

Gambling is a far more hazardous undertaking, with the only long term winner being the person accepting the bets.

The only difference in these unprecedented times is that we are operating with deeper downsides, requiring numbers-based latest trade and customer insight in order to assess how much risk we are actually taking.
But nothing replaces the need to then take the risk…. 

NB. For those wanting more insight on how to shorten the odds, it also helps to distinguish Risk Intelligence, a purely intellectual ability, from Risk Appetite, an emotional trait, more to do with how comfortable you are with taking risks. Risk Appetite governs how much risk you want to take, while risk intelligence involves being aware of how much risk you are actually taking… ( More )

Tuesday 22 January 2013

Customer in trouble - your call?

'The big ones hit the headlines, but when you see them all in a list....'

Given the cost of recovering lost profits when a customer goes bust, it is obviously vital that suppliers watch for the signs of trouble and act faster than the other guy. Obviously the finance department are equipped to pick up the signals in a customer’s annual report, but this merely gives a historical view.

Why the NAM view is crucial
However, when combined with a NAM’s daily experience of being in the market, continuously being exposed to a mix of weak and relatively healthy customers, understanding the effect of business pressures on interpersonal relationships, being subject to all the stress-symptoms of a customer drifting to the edge, and usually tasked with the job of filling the supplier’s profit-gap via incremental sales, it is more important that early warnings detection and signs of possible recovery be built into the NAM role.

This means NAM’s should familiarise themselves with the key financial indicators (see above) and couple this with any signs of a stress-driven deterioration in their dealings with the buyer and other functions within the business, and hot-line their findings to their finance colleagues…

It goes without saying that NAMs should then be part of any decision to modify (application of credit limit, withholding supplies etc) any aspect of the trading relationship, given that the NAM will have to communicate the decision to the customer, handle any flack arising and have to find the appropriate incremental sales elsewhere…

Anyone having issues ref pulling the plug should remind themselves that if their net profit is 5%, and a customer goes bust owing £150k, then the incremental sales required for recovery of profits are £3m….

More here & here

Wednesday 16 January 2013

The Prompt Payment Joke....

Given the problem of companies’ increasing use of extended free credit as a source of free finance in these credit-starved times, the government is attempting to tackle the wrong problem, all in the name of protecting the little guy…Ha!, Ha!, Ha!

Even a cursory glance at the Prompt Payment Code will reveal that it focuses on paying within an agreed time. In other words, depending upon the credit period agreement into which a trading partner has been forced, be it on delivery, or within 5, 30, 60, 90, or even 180 days, a company can comply with the Code by paying by the specified date…

The humour starts with the consumer’s cash payment to a retailer. Then, despite zero-defect daily delivery of some SKUs, the retailer feels compelled to demand up to 90 days to bridge the cashflow gap between delivery of goods and payment by the shopper… (Ha? Ha?) 

When challenged to explain the joke, the retailer refers to market ‘norms’, without pointing out that these ‘norms’ have been creeping out from 30 days to the current 45 days in recent years, in readiness for a move to 90, as soon as sufficient retailers have helped to establish this new ‘norm’…

Suppliers who complain are told that there is 'obviously no compulsion' to agree the terms, they are free to sell their goods elsewhere at whatever terms they can agree, ignoring the fact that a customer taking 15 -30% of one’s output does not allow for alternative access to the consumer…  (Ha? Ha?).

But the really ‘funny’ bit is the process whereby larger members of the supply chain simply pass the credit burden back along that chain, “reflecting market norms”, until the point of least resistance is reached, the little guy who re-mortgages to the hilt, or cracks under the strain… (Ha! bloody Ha!)

However, and the biggest laugh of all, in spite of this upfront cash advantage, even the big retailers are suffering sales and margin-wise with some retailers having come to depend on the free-credit norm to such an extent that unplanned falls in consumer demand have caused these cash businesses to succumb to the inevitable….
Their carcases litter the high street…  (your turn!)

Time for everyone to quit the joking, and sort out the real problem?
(For starters, how about passing on the joke, this one needs to go viral…?)

Wednesday 10 October 2012

When Major Customers Become Major ‘Share-holders’...

Yesterday’s news that a major pizza manufacturer fell into administration following the loss of a major contract, raises the issue of risk in dealing with large customers.

With the possible exception of those supplying M&S, major customers’ share of a supplier’s business tend to replicate retail market shares.

Fair shares in the marketplace
In other words, in the food sector, the major mults’ shares of a typical food suppliers business might be
- Tesco            30%
- Asda             17%
- Sainsbury’s    16%
- Morrisons      12%

With Health & Beauty, the shares would obviously be skewed in favour of Boots, sometimes taking  a 30+% share.

To access the full potential of a product, this suggests that a  supplier should aim at achieving these relative shares in the marketplace.

Dealing with a customer you like...
However, given the differences in relative compatibility*, a supplier can find that they ‘get along’ better with some customers, making it ‘easier’ to collaborate, resulting in that customer’s share becoming greater than its market share. This can sometimes lead to a point where it can represent more than 40% of the business, a position that is not desirable for supplier or retailer, given the consequences of termination for each party, including possible negative (and often undeserved) media coverage for the retailer..

Fair share and risk
Given the risk profile of the supplier (risk-seeking, risk-neutral or risk-averse) it is important to attempt to achieve and maintain ‘fair shares’ as per above.

In the event that a customer begins to ‘over perform’ it is obviously important to follow it all the way, at the same time diagnosing probable causes and attempting to replicate the process with other major customers. In which case the Ansoff Matrix on developing business, could provide a few pointers…

In the current climate, we may devote so much time avoiding the possibility of a customer going bust, we can run the risk of a customer being too successful, with equally catastrophic consequences…

* See qualities of a good trade partner

Friday 5 October 2012

Premier Foods - the split-up options

Following Premier Foods appointment of a new COO with a brief to help see the grocery and bread businesses managed as two distinct divisions in recognition of the different “opportunities and challenges” facing each business, it might be useful for NAMs to explore the options and possible actions available to the company. This could add insight on how the company will manage the trade and also help you anticipate the impact on competing brands.

Essentially, the company needs to increase its perceived value in the market and thus raise its share price. This will not only give it more autonomy but will also make it easier to sell all or part of the operation at the appropriate time..

The emphasis will therefore be on improving its Return On Capital Employed (ROCE), a driver of the share price.

Step 1
The first step has to be a split of bread and groceries, given that they are totally different business models.
  • Bread is a fast moving, high rotation (daily), high wastage (10+%), short shelf life (days/weeks) and narrow margin business, especially supply-side, whereas
  • Grocery is slower moving, low rotation (2 monthly), lower wastage (2+%), long shelf life (1-2 years), more generous margins supplier and retailer
Bread: Premier need to strip out cost, sell-off non-core parts, simplify and explore possibilities of sharing the distribution burden

Grocery: Here they need to continue emphasis on a limited number of power-brands and sell off anything non-core

Step 2
The company will then be in a position to apply the ROCE principles to what remains on the two businesses.
ROCE = Return on Sales  x Sales/Capital Employed  i.e. improve the margin and speed up the rotation of capital (factories + stocks, debtors and cash)

Companies are either in a narrow margin, fast rotation business, or they are in a higher margin, slower rotation business. This is why splitting the bread and grocery businesses is a long overdue no-brainer….

Step 3
First they need to focus on improving Net Margin by
  • Increasing their selling prices and sales (more advertising on fewer power-brands, up-skilling the negotiators)
  • Reducing the levels of discount and promotional expenditure ( did I suggest it was going to be easy?)
  • Reducing the levels of sales and distribution costs (hence hiving off the bread business, and need for special vigilance on trade funding and compliance)
  • Driving volume, especially bread but also grocery power-brands ( move to more responsive social media )
  • Changing the product mix to focus more on higher margin items, (consumers permitting…)
  • Minimise ‘specials’ in terms of tailor-made deals/trade arrangements of any kind, (they just cost more…)
Step 4
Then comes increasing the Rotation of their Capital by
  • Driving the volume of sales as high as possible, using existing or lower levels of Fixed Assets (factories, plant), + Current Assets (stocks, debtors and cash)
  • Getting paid faster via settlement discounts, ‘delisting’ any financially unstable customers
  • Improving sales forecasts i.e. if they forecast 100% and achieve 95%, then 5% of sales become ‘passengers’ with their costs shifting onto the 95% that are sold, thereby hitting the bottom line
  • Generally, improving their ability to convert business cost into revenue…
These moves will drive the overall ROCE, increase the share price, and make each or both of the companies easier to sell, if necessary.

If all of this seems a bit theoretical, why not watch this space over the next six months? You will then be looking at historical moves, whereas some of the above points may help you anticipate and take appropriate action NOW, when it really matters…

Wednesday 26 September 2012

Sao Paulo, 120mile traffic jams (+kidnapping)…

Next time you are stuck on the M25 on the way to Cheshunt, spare a thought for your colleague KAMs in Brazil, where traffic jams of 120 -180 miles in Buenos Aires are routine, wjth the added threat of being kidnapped for those KAMs working for major suppliers..
Several years ago while running a workshop at local headquarters of a multinational client I was informed that my personal bodyguard was essential in order to avoid the inconvenience and cost ($50k) of having to pay my ransom in order to conduct the workshop without interruption.
However, the $50k was a mere trifle compared with what they would have had to pay to release their global chairman, who paid a surprise visit from Europe, transferred from the airport by helicopter, landed on the roof, and participated in the workshop for 30 minutes before flying back to Europe again, all before the local mafia discovered he was in the country!.

The secrecy left me only moments to add a couple of spontaneous pleas for more local-KAM empowerment, before attempting to continue the session as planned.
Nice to be appreciated, if only via the price of a ransom…

Thursday 2 August 2012

Tesco's credit rating – what it means for you?

Yesterday’s warning by Standard & Poor that ongoing pressure from intensifying competition, weak consumer spending and lower profits could trigger a downgrade to its risk profile and credit rating should not be seen as another nail in the Tesco coffin.

Tesco's previous ratings
In fact, regular readers will know that Tesco have been here before (Moody’s in April 2012, and May 2009). It also helps to bear in mind that the credit rating represents the credit rating agency's evaluation of qualitative and quantitative information for a company or government; including non-public information obtained by the credit rating agencies analysts. Yesterday’s announcement referred to a long term (i.e. after a year) rating, making it more expensive to borrow, but no issues in the short term.

Why the rating matters to you
However, the mention of  ‘lower profits’ as a cause, means that Tesco is effectively prevented from drawing heavily on current profitability to fund its £1bn revitalising initiative, or indeed any ‘nuclear pricing’ options (see KamBlog).

What Tesco needs to do
Apart from a need to make "targeted" disposals, cutting back capital expenditure and/or shareholder pay-outs as possible options, the ratings threat means that Tesco will be forced to place more emphasis on internal savings….
As you know, for a retailer these can include a combination of cost-price reductions, optimising of credit terms/settlement discount trade-offs, increased trade funding, strict application of deductions and improved service levels…

This means it is perhaps time to re-evaluate your position on each of these elements of your Tesco trading relationship, as a basis for determining your fair share of any help Tesco may require in funding its strategy.

Deriving your bespoke rating of the customer:
Finally, a ratings agency score can be a fairly blunt instrument from a NAM’s point of view. Better for you to derive a bespoke rating via a combination of analysis of the customer’s ROCE, Net Margin, Stockturn and Gearing, overlaid against your terms, trade-funding and service level, in order to establish and demonstrate your fair share of any remedial action…

Not doing so can represent more risk than you need, in the current climate.

Wednesday 2 May 2012

Buyer-seller corruption, a potential hot-potato for all?

Yesterday’s court case involving large-scale corrupt payments to a potato buyer raises important issues for suppliers and retailers. Given the potential impact on share prices of both parties, coupled with ever stringent corporate and government monitoring in these unprecedented times, it is surprising that anyone is nowadays prepared to take the risk of being a party to corrupt inducements to buy. In other words, it needs just one person with a conscience, or a grievance, to lift the lid….

However, given that the current plaintiff was arrested in 2008, with the case having now arrived in court, it could be said that parties on each side of the seller-buyer relationship harbouring any doubts re. their version of the selling-buying process have had adequate time to reflect on the implications and take appropriate action.

The distinction between gifts and bribery
If buying decisions were made solely on objective, rational criteria, a computer would probably do a better job. Instead, given that the basic offer satisfies the key objective criteria, then a host of emotional criteria/influences/needs come into play.

Emotional needs in buying 
These include needs for avoiding effort, self-esteem, (pride, self-importance, power), to imitate, to acquire money (via saving vs. making, for the company) need for possession (icing-on-cake), investigate (data), create (new), sense of duty, and especially a need for security (avoiding fear). These can include meals out, or even a bottle of whisky at Christmas.

It needs to be emphasised that such attempts to satisfy the emotional needs of a buyer are not corruption, they are merely ‘icing on the cake’ by way of celebrating a done deal, a deal which ticks all the rational, objective boxes.

Bribery defined
Bribery is quite clearly an overt inducement to the buyer to over-ride the logic of a buying decision where a supplier’s competitor is patently offering a better deal on a like-with-like basis. In other words, the supplier’s offering is equal with that of the competitor except for the additional £10k on the price to fund the bribe.

This point, the first of many, was brought out yesterday in court by the prosecution: "A peculiar feature of the corruption was that it was self-funding. [The supplier was] not paying for it, [the retailer was] paying for the corruption of their own buyer and this was achieved by overcharging [the retailer]".

Action for NAMs and KAMs
The answer for NAMs/KAM’s is always to attempt to revert to the base deal and check that it satisfies objective buying criteria (the buyer’s job needs), like-with-like, before focusing on the buyer’s emotional needs. In practice some of this process occurs simultaneously, but it remains vital that the supplier’s basic offering is defensible and transparent, always, and with 20/20 hindsight…..its the nature of the job, folks. 

Thursday 15 March 2012

Where now for Tesco succession?

Too early to check the hats in the ring, we believe the City will give Clarke a year, following the Brasher development.

Decision time
-  A fast, high-level internal switch would allow Clarke to maintain global momentum. 
-  Going outside for what would need to be a strong, experienced and ‘natural-for-the job’ player would take too long, might simply re-ignite possible internal career-pressures, and could suggest a possible Clarke-replacement option for the City….. 

Marketplace reaction
Meanwhile, competition in the marketplace will be a combination of Tesco defence, with other multiples attempting various degrees of land-grabbing, all now led by very experienced teams focused on optimising this new window at Tesco’s expense.

Supplier action
Suppliers now need to revisit their trade strategies to reflect new competitive appeals in an unprecedented market, and factor in probable moves of the mults. Retailers will not waste time being subtle, so the moves should be pretty obvious.

Then working from 'their' consumer back to the essence of the brand, suppliers should simplify and make the offering very transparent, and echo this in simplified trade strategies, with built-in fair share and compliance conditions, all the way through the supply-chain...

Or sit on the sidelines, have a better view of the race 
and wait for things to settle down...
Either way, it is going to be tough, very tough for all stakeholders…

Wednesday 14 March 2012

If a customer delays payment... Time for the six honest serving men?

In the current climate, it is probably more a question of ‘when’, rather than ‘if’, but for the moment let us stick with the main question.
Either way, payment delays cost you money and increase your risk-exposure.
Although credit control is someone else’s job, you are the one with total responsibility without authority.
And besides, would you really want a finance colleague trying to get incremental sales from a customer, in order to recover lost profit?
The key issue is ‘why’ the delay?
Essentially, the customer is either in trouble, short of working capital or someone else is shouting louder (a rival supplier offering more Settlement Discount?).
‘Who’ is driving them?
If the ‘who’ happens to be the bank, a quick check of their recent annual report (remember ‘what’ you downloaded from Companies House within minutes of publication four months ago but is still on your ‘must-read' list?) in the Balance Sheet ‘where’ in the outside borrowing section you will find creditors i.e those excluding the guys ‘who’ give them credit free of charge, trade creditors, like you…
This will help you calculate their gearing, and if significantly greater than 30% of Shareholders Funds, it is time to reach for the button…
While checking the Annual Report, the P&L will also reveal the Net Margin for two years, and if less than 2% and heading South, any upward correction is going to be at your expense…
‘How’ it happens?
This will come via ‘deductions’, possibly a delay in payment because of faults/shortages in delivery, with each invoice presenting a new opportunity…
‘How’ you deal with rolling invoice queries can be an opportunity for you to shine in in-house financial circles.
‘What’ to do about it?
How about dividing your annual sales to the customer by twelve, and negotiate with their buyer/finance department that they pay a fixed ‘twelft’ each month by standing-order for eleven months, leaving the final month’s invoice for all the queries?
The end-game..
If the customer is simply reflecting a supplier’s bad invoicing discipline, then the above approach combined with more accuracy on your part, will probably work.
However, if the buyer is simply using excuses, any excuses, to delay payment, this will tell you ‘when’ it is time to give the six honest serving men a rest and ring the lawyers…

P.S. According to Kipling, the 'men' rest from nine-to-five, and never skip meals...  Perhaps 24/7 NAMs/ KAMs need other tools for office-hours?

Tuesday 15 December 2009

Optimised Duty Free at Heathrow?

Attempting to check in at one of the world's most crowded/high-profile airports, how bizarre that having had shoes, belt, jacket, laptop, watch, aerosols, sharp instruments and all liquids removed and x-rayed, been virtually 'strip-searched' via a full body-scan sensitive enough to detect metal teeth-fillings, the passengers are then encouraged to buy (at a discount!) a couple of litres of highly inflammable liquid in glass (not plastic!) bottles, to be hand-stored for easy access under the seat in front, or in the overhead locker ("where they can possibly fall out and injure someone") and are then presented with a pair of flight-socks fine enough to fit through the neck of each bottle, allowing the passenger to spend the remainder of the flight, under cover of semi-darkness, quietly assembling and even deploying a couple of DIY Molotov cocktails…

(Alternatively, why not simply be issued with a receipt in Duty Free, for collection of purchases on arrival at the destination?)

Have a safe journey…..!

Wednesday 15 April 2009

Coping with the Empty Shops Syndrome…

Our medical friends use 'syndrome' to describe a recognisable collection of symptoms and signs indicating a particular disease or condition, which is probably an apt summary of recessionary impact on the retail trade.
With shop closures approaching 15% of national retail-space, (and some extremes like Gateshead at 52% !) and the government now encouraging the use of artistic window-dressing to disguise failure in the High Street, it is probably time for suppliers to rethink their routes-to-consumer strategy…
As Tesco and the discounters cannot be expected to fully absorb the growing over-capacity, the real issue for suppliers has to be the degree of permanance in terms of reduced retail space.
Instead of waiting for the endgame to play out, proactive suppliers could conduct a risk-analysis of the impact on their business of a 15% reduction in existing space (Risk analysis )
Then, assuming that retail demand will revert to pre-recession levels (!) the supplier needs to estimate the combination of shops and online that will absorb the business lost in the High Street.
This means re-auditing their trade management model (see Kamshop for a copy of our Trade Marketing Audit Checklist) and optimising the productivity of the customers still standing…while others sit and wait (or visit the new craft-shops)