Are payments from suppliers to customers ever ethical?

Robert GillingwaterThe idea of a customer receiving a payment from its supplier almost seems counterintuitive, yet the practice appears to be widespread in the UK economy.

A recent survey by the Federation of Small Businesses (FSB) found that 5 per cent of businesses had been asked to make a payment or face being delisted from the supplier roster. Yet recent stories of large organisations demanding payments from small businesses were met with public outcry, illustrating that levels of acceptance do not match the practice’s prevalence.

Businesses put in a position of paying to stay are faced with a tough decision. It would be easy to suggest they simply refuse to make a payment; but in realty it’s not always that simple. Small firms in particular are often reliant on a few core customers – not being in business with them could mean not being in business at all.

But what about when the customer is struggling to survive? In the recent revelations about ‘pay to stay’, it was revealed that one of the UK’s largest food manufacturers had demanded payments from its supplier in order for them to remain on their supplier list; what was also revealed was that it had suffered severe financial difficulties in recent times.

Perhaps the circumstance of the pay to stay participants - the customer or the supplier - must be considered before they are deemed unethical. Circumstance is important but so too is time. The length of time these arrangements are in place is significant for both the supplier and the customer. If the customer is experiencing a time of financial strain then it is perhaps fair it would consider all options to ensure it remains operational, this of course would not just be in the best interest of themselves but also their supply chain.

But receiving payment from suppliers should come with guarantees which ensure that the supplier is making an investment as opposed to a one way payment. Ensuring there are tangible benefits for the supplier is one way of ensuring payment requests do not become exploitative and one-sided. For example, a customer who wants to reduce their roster presents a real opportunity for suppliers who could gain a larger proportion of their customer’s business if they choose to be retained by offering payment. It may also be more cost effective for the customer to make a payment than to develop their business elsewhere but the incentive to invest should be at the forefront of any agreement.

Receiving payments from your suppliers is potentially a lucrative agreement but customers must be aware of the possible adverse effects of such arrangements. Simply having a supply chain made up of only those businesses who make payments is not a profitable long term option. It would negate the normal process by which suppliers are selected; namely their price, quality, loyalty and reliability. Furthermore, suppliers who make such payments and know they won’t be delisted have no incentive to innovative and develop products for the customer.

Given the right parameters and industry setting, pay to stay arrangements have a place in commercial dealings. Yet this may be the case no longer. The Department of Business, Innovation and Skills has asked the Competition and Markets Authority to investigate such arrangements. Legality and not just morality will be a consideration for the customers of tomorrow.

Robert Gillingwater is a consultant at Procuring

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