News focus: Supermarket supply chain 'bullying' harming procurement's reputation

Will Green is news editor of Supply Management
10 March 2015

Retail purchasing, especially in the grocery sector, has been plagued with accusations of bad buyer behaviour. So are a handful of supermarkets ruining the profession’s reputation? Will Green looks at the results of SM’s retail procurement survey.

Almost nine in 10 respondents to an SM survey of 1,002 buyers believe supply chain ‘bullying’ tactics associated with supermarkets are giving the procurement profession a bad name.

The overwhelming result comes against the background of a number of high-profile cases, including Coles in Australia and now an investigation into Tesco in the UK, and a barrage of criticism from bodies representing suppliers.

Anger has been expressed by survey respondents (nearly 10 per cent of whom work in retail themselves), with one person pointing to “the kidnap of our profession to the goal of savings” and another referring to a “stranglehold” retail buyers have on farmers.

A spotlight has been shone on practices in the sector with the admission by Coles Supermarkets that it engaged in “unconscionable conduct” by seeking rebates from smaller suppliers and asking for payments for “purported profit gaps, waste and markdowns and late and short deliveries”. Under a court-agreed deal it will pay penalties of around AUS$10 million and costs of AUS$1.25 million.

Meanwhile, groceries code adjudicator (GCA) Christine Tacon has launched an investigation into Tesco’s treatment of suppliers after having formed a “reasonable suspicion” that it has breached the Groceries Supply Code of Practice.

A separate poll of suppliers by the Federation of Small Businesses found almost one in five small firms has been the victim of “supply chain bullying”, with the most resented practices being pay to stay, long and late payment, early payment discounts and “retrospective discounting”.

At the same time, the Institute of Directors has warned that late payment is “threatening to undermine the strength of the economic recovery”.

David Noble, group CEO, CIPS, says the onus sits at the top of organisations. “The ultimate responsibility must be with boards and CEOs of companies to interrogate their supply chains and understand what exactly is happening and who is responsible and accountable,” he says.

“There has to be some humanity in the relationship with suppliers in the retail sector, and I hope that as the debate continues, this will come to the fore. In the end, the basic principles of good procurement practice are the same. Whichever profession practices them, procurement skills are transferable across all sectors and if other sectors can act responsibly using our Code of Ethics, retail can too.”

A total of 86 per cent said it would help if professional procurement qualifications were a requirement for all involved.

Our poll found the most unpopular “bullying” tactic, by a long margin, was pay to stay, cited by almost half of respondents. In December, the Labour Party called for the practice to be outlawed.

Late payment and lengthy payment terms were the next least popular practices, each cited by just under a fifth of people. One respondent claimed supermarkets charge “at least £1,000” if a delivery is an hour late, while another said: “Most suppliers are paying between 25-30 per cent just to sell their product. [This] leaves no money left for advertising or innovation.”

Ian Robinson, procurement director at Innovia Films, says: “Using leverage to drive down cost is a well-used tool in every buyer’s toolkit, but it sits alongside many others. It strikes me that in the turmoil, some retail buyers have mislaid their toolboxes and are reliant on the equivalent of a sledgehammer.”

Bad Press

Question 3

When people were asked about the worst scandal to hit the sector in recent times, just over 30 per cent mentioned instances of modern slavery and the use of child labour. The horse meat scandal was cited by just over a fifth, closely followed by supermarkets’ treatment of suppliers.

David Read, chief executive at Prestige Purchasing, says there is a lot to respect about retail supply chains. “The retail grocery sector in the UK is one of the most sophisticated and mature in the world, and there is much to admire about the way it has built highly efficient, effective and responsive supply chains.”

But he adds: “The food market has been rife with rumours for years about inappropriate buyer behaviour brought on, it is suggested, by just a handful of retailers controlling a multi-billion pound supply chain.”

Food critic Jay Rayner tells SM the big supermarkets have not kept up with consumer trends. “The reality is they have reaped what they have sown,” he says. “Incidents like the horse meat scandal made consumers aware that the pressure on price is not necessarily a good thing. The mass retailers should not be surprised if people have lost faith in them.

“One of the reasons discounters have done so well is their economies of scale enable them to do really good deals with their suppliers. The great mistake the big full-service supermarkets made was to think the consumer would be wary of a drop off in quality. The consumer has been quite smart and worked out there was no drop-off in quality and all they were trading down to was a drop-off in choice. Choice is not the key thing. They want a good price and quality but also want to feel suppliers are not getting stiffed in the deal.”

Under pressure

The rise of the discounters has added to the pressures faced by the big four supermarkets, whose market share is predicted to fall from 42 per cent currently to 34 per cent in 2019, according to Prestige Purchasing.

Robinson says: “Allegations of supply chain bullying certainly won’t help the image of the procurement profession, but at the same time, we have to recognise the tremendous pressure supermarket buyers are under. The rise of discount chains and increasingly cost-conscious consumers has impacted top lines, leaving buyers with the Herculean task of bolstering the bottom line.”

A repeated concern among survey respondents was the treatment of farmers and the use of milk as a loss leader. UK politicians have called for the GCA’s powers to be extended to milk producers in the wake of a 50 per cent price fall over the past 12 months and National Farmers’ Union warnings the number of dairy farmers could halve to fewer than 5,000 by 2025. 
One respondent said: “Supermarkets’ treatment of farmers is disgusting, in particular the milk industry.”

Another said: “Contracts are one-sided and quality, which is an entirely judgemental process, is used to refuse to accept contracted volumes if the supermarkets are 
not selling. Risk should be shared equally, not placed entirely at the lowest point in the chain, which 
has the least resilience.”

When it came to what retailers could do to improve their reputation, the survey produced a clear message: improve transparency and traceability in supply chains. This was cited by almost 44 per cent of people, followed by 28 per cent who said helping consumers understand the potential human cost of cheap goods.

What could retailers do to improve their reputation?

Transparent chains

Rayner is in total agreement. “The only way you can do transparency is to have shorter supply chains,” he says. “The long supply chain has to become a thing of the past. This is not about localism. It’s about being able to show where your food came from. Clearness on supply is what’s needed.”

However, he is cautious of shoppers who profess to be driven by ethics. “Consumers being questioned in surveys about their views may well say one thing and yet go away and do entirely another,” he says. “We should be wary about consumers clambering onto their high horses when they are still willing to buy the products.”

Survey respondents put the issue in starker terms. “If your supplier fails to make money, they will go out of business,” one said. “In the retail world, the buyers don’t seem to care about this and they take the view that if they go out of business, ‘who cares? We will just buy another product from elsewhere’. This attitude has to stop and they have to start behaving and sourcing responsibly.”

None of the supermarkets overseen by the GCA wished to comment on the research, and nor did the British Retail Consortium. The Food and Drink Federation says relations between suppliers and retailers were good “for the most part”, though it passes on anonymised information to the GCA when empowered to do so by members. “For the most part grocery suppliers enjoy productive and profitable trading relationships with their retail customers,” says a spokesman. “Should companies raise cases where excessive risk and unexpected costs are passed down from retailers to suppliers, then it is for the GCA to investigate.”

Tacon says having a code of conduct is “all very well”, but top-down cultural change in businesses is necessary. “What objectives have you set your buyers?” she asks. “Are you actually putting them in a position where you are forcing them to break the code to achieve their objectives?

“The real sweet spot is where the buyer and supplier can resolve an issue the instant it’s raised,” says Tacon, though she adds: “We might need a new generation of buyers” to bring about wholesale change.

Helen Walker, a professor of operations and supply management at Cardiff Business School, says suppliers could counter the dominance of supermarkets by “joining together to form supplier consortia or hubs, which can give them a stronger position”.

“Ultimately, such retail supply chains are all about getting the right product on time at the right price to customers,” she says, something survey respondents admired (see Q5). “Moving towards greater transparency, commitment and collaboration between buyers and suppliers helps in sharing value along the supply chain, so that risks and rewards are shared, and not only the supermarkets come out on top.”

One respondent summed up what was required in simpler terms:

“Just being a bit nicer in general.”

Do you think those who do direct purchasing (buying goods for resale) need different skills and knowledge to indirect buyers?

 

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