This blog by Andrew Cox (originally posted on Spend Matters) discusses procurement practices in the retail industry that have come under recent scrutiny and criticism.
Peter Smith (Bullying Suppliers – Unethical and Stupid on Spend Matters) raises some interesting points about the ‘unethical and stupid’ behaviour of food buyers. He reports the recent supplier leverage strategies of Tesco, Sainsbury, Premier Foods and 2 Sisters as evidence of ‘bullying tactics’.
While this may explain Peter’s own ethical position, which he would also like to see CIPS (and presumably other Purchasing Associations?) institutionalise (or at least take a position on) as unacceptable behaviour, my view is somewhat different.
For something to be ‘unethical’ it must be contrary to an agreed set of moral/ethical principles. It is not clear at all, however, what set of business practices by food companies Peter is suggesting are in breach of ‘ethical’ behaviour—unless he (and others of a similar disposition) mean that buyers and suppliers must never seek to change the terms of a contract during or, in some cases, even after a contract has been terminated?
Clearly, if a food buyer asks for a rebate, or finds a legal mechanism to delay payment terms, or asks suppliers to provide a financial payment to remain as a supplier, they are attempting to use more aggressive leverage. It is not clear, however, why any of this is ‘unethical’?
The uses of ‘within-contract’ and ’post-contract’ leverage’ by buyers is a common practice (and not just in the food industry). It is normally brought about by an unexpected change in the power position of the buyer. A typical example is when there is an unanticipated increase in its own market competition, undermining the buying company’s financial position. This obviously explains a great deal about the causes of recent and apparently more aggressive behaviour by food buyers.
The problem with calling these practices ‘unethical’ is that suppliers are not averse to doing exactly the same thing when power shifts in their favour during a contract. When customer or market demand unexpectedly outstrips supply many suppliers will often ask for price increases to ensure the same level of quality/service previously agreed contractually.
Calling these practices ‘unethical’ serves little purpose because history shows that buyers and sellers always tend to be opportunistic in the face of unanticipated shifts in demand and supply. There is an old aphorism that is perhaps helpful here; “First comes food, then morality.”
Since business relationships are not (nor could they ever be) governed by any nationally or even internationally agreed set of enforceable ethical/moral principles, the major protection for buyers and sellers in markets is that their agreements are protected and governed by legally enforceable contracts, that assign rights and responsibilities to both parties. These can be defended and ultimately challenged in the courts if either party is in breach of the terms of the initial agreement.
Therefore, if a buyer attempts to leverage suppliers more aggressively during, or after, a contractual term, a supplier is completely free to either challenge it (and take the buyer to court if they are in breach of contract), or accept it, and get on with the job. The same legal rights are afforded to the buyer if the supplier leverages them during, or after, a contract.
Presumably, if either party to the agreement tolerates increased leverage it is because—lacking sufficient power and leverage resources—they do not have any better alternatives, and must provide better value to the buyer or supplier in order to retain the relationship. This has nothing to do with ‘ethics’ but, as Peter intimates, everything to do with power in business relationships.
It is worth concluding with the thought that if food buyers are able to use ‘within-contract’ and/or ‘post-contract’ leverage to extract more value from suppliers, then are we not really witnessing more effective (competent) negotiation by buyers who historically (in the good times) had ‘left something on the table’ with their suppliers?
In this light it could be argued that the current press and media blitz on ‘ethics’ in food supply chains is really nothing more than a skilful attempt by food suppliers to provide themselves with an ‘ethical’ bargaining chip (power lever) in their negotiations with buyers. This is surely nothing more than ‘the rules of the game’.
Unfortunately, whatever one thinks about these practices ethically, what they actually demonstrate is a failure by some food companies to fully appreciate the power and leverage circumstance that they are in, thereby leading to the pursuit of potentially misguided (and ultimately ineffective) sourcing and relationship strategies.
In this light the aggressive short-term sourcing strategies condemned by Peter and others (Four Pillars’ David Atkinson, 2 Sisters, Tesco, and now, beans and beer giants Heinz and AB InBev) are examples of buying companies that have failed to fully understand some of the key factors that must be considered when using power and leverage with suppliers. Such failures—rather than ‘unethical’ behaviour—are more likely to put at risk the search for improved value for money, that is likely to be necessary if food companies are to remain competitive in the future.
How these competence gaps can be eradicated will be subjects for the future.