Tactics used by Tesco to delay or reduce payments to suppliers in order to make its own financial performance look better are common practice in the retail sector.
It is not unusual for larger customers to put undue pressure on suppliers; either by failing to make payments on time or by demanding cost reductions or ‘rebates’ to support the customer. The pressures to deliver earnings growth in a tough economic climate, coupled with the increasing competition on the high-street has forced some large retailers to take advantage of their strength with suppliers, particularly those that are overly dependent on their business.
By publishing her report about Tesco, the Grocery Code Adjudicator is sending a clear message to the retail sector that such practices will not be tolerated and that companies must start to behave in a fairer and more collaborative way.
One of the methods criticised heavily in the report was Tesco’s use of ‘unilateral deductions’ from money owed to suppliers. Such unforeseen reductions can put extreme pressure on suppliers – particularly if they are imposed at short notice after most of the production has taken place and when the supplier has no choice but to accept the new terms. Refusing to do so could force some suppliers out of business.
In continental Europe it is common practice for suppliers to be offered a choice of payment terms at negotiation stage or even on presentation of invoices. For example, the supplier may be offered the agreed payment based on 60 days, or 30 days if they agree to a two per cent discount on the price of the goods. The decision is entirely that of the supplier.
Using these types of agreement, the supplier benefits from the choice as to whether cash or margin is more important to their business at that time, which could be to their advantage if cash is suddenly needed. The buyer benefits from discounts with some suppliers. Where the line is crossed is when these discounts are imposed, whether or not it comes with faster payment. Late payments or the uncertainty of not knowing when payment will happen can damage a supplier’s ability to safely manage cash.
From April this year, it will become a legal requirement for large companies to publish details of their payment practices on a biannual basis, including the average time it takes for the firm to pay up, and the percentage of payments that are not made on time. The impetus to change their approach to supply chain management will become stronger at this point.
In the long run, treating suppliers unfairly will impact market reputation and ultimately, result in higher costs from the supply chain. Companies that become known as ‘late payers’ tend to attract weaker suppliers that are more desperate to do business and are less likely to be investing in new equipment or innovation. It can even lead to the supplier outsourcing production to cheaper factories without the buyer knowing, which introduces all kinds of potential risks. In the end these weaker suppliers may not survive, reducing market competition and strengthening the hand of the stronger, better suppliers.
Stronger suppliers will be more inclined to steer clear of difficult potential customers or simply build this extra cost of doing business with them into their prices.
To avoid being named and shamed in the future, or significantly disadvantaging themselves in the supply market, forward-thinking retailers need to work together with suppliers in a culture of fairness and collaboration.