No buy-in for under-payment

20 September 2006
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21 September 2006

A number of major retailers have been criticised for making deductions from suppliers' invoices, but are the cuts sometimes justified? Paul Snell reports

Unprofessional"… "abuse of power"… "corporate bullying". The majority of the purchasing profession is united in its criticism of retailers that impose deductions from suppliers' invoices. Their reactions follow the news that discount fashion retailer Matalan has become the latest high-street chain to impose new supplier terms.

Many companies are imposing mandatory "contributions" and deductions from invoices.

And often it is big firms that are responsible. When Matalan decided to deduct a "mandatory contribution" of 2 per cent from supplier invoices, it put the decision down to the fact that other retailers are doing the same.

And they are. Earlier this year Halfords told its suppliers to accept new 120-day payment terms and price cuts of 5 per cent each year. New Look also extended its payment terms for suppliers to 75 days from July. And Marks & Spencer has told its direct suppliers to expect payments to be cut by 10 per cent from April.

The supermarkets are also at it, with Asda expecting multinational suppliers to contribute between £10 million and £60 million to "promotional costs".

Despite the growing trend, 73 per cent of buyers surveyed in the new Supply Management SM 100 said it was unacceptable, while 24 per cent agreed with the practice.

"If retailers are making percentage cuts to achieve a cost reduction it is unacceptable," says Adam Smith, senior buyer at electronics manufacturer Ceramaspeed.

And buyers warn of the damage to relations with suppliers. According to Peter Easterby, European sourcing specialist at transport company Honeywell, it is not an effective way to build relationships. "How would buyers react if the coin was flipped and suppliers, without agreement or warning, added costs to their invoices? Would they be paid?"

Steve Caddell, senior supply chain manager at Atkins Asset Management, says there is an even greater risk to purchasing's image: "A deal is a deal. We must protect the integrity of our industry otherwise sellers will make our job harder. The tactic may work once, even twice, but surely the seller will make provision for these cuts in future invoices."

And what is the justification from retailers? Halfords said the changes were needed for "continued investment". M&S said it made the changes to cover costs in marketing, new stores and online trading. New Look attributed it to "increased investment in store space". Matalan cited "difficult trading conditions" as its justification. The retailers point out that increased investment in stores benefits suppliers.

Some purchasers believed poor supplier performance, service or quality were acceptable grounds for making deductions. "It is reasonable where services or deliveries have fallen short of what was promised," says Paul Revell, senior buyer at Card Protection Plan. "But only as a last resort after negotiations."

Steve Graham, supply chain director at Re:source East Midlands Procurement Hub, says it is only acceptable "if the supplier is also provided some mutual benefit, such as guaranteed payment on time".

But as Barry Kull, global business partner at AstraZeneca, says: "Suppliers are in business to make money and when their ability to turn a profit is threatened by a customer short-paying an invoice, any trust vanishes. Regardless of what is done by the customer to satisfy the transgression, the supplier will not trust the relationship."

Perhaps the big companies should heed Sir Alan Sugar's example: "You have to build relationships with your vendors. So that in the bad times and the good times you have support."

SMsep2006

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