Tesco procurement practices exposed and it’s not pretty

An astonishing news story emerged this week via The Independent newspaper detailing some of the procurement practices of the UK’s largest retailer Tesco, from the viewpoint of an understandably anonymous supplier to the supermarket chain.  This bad publicity is on top of the £250m overstating of half-year profits, which has sent the company’s stock price tumbling.

The tone of the piece is angry and somewhat despairing, but it also offers a stark warning to Tesco; better commercial terms are being offered to Tesco’s competitors.

For years we have been bullied and browbeaten by Tesco’s buyers, who demand a lowball price for our goods then keep screwing us for more as the contract goes on.”

“Now compare that with Aldi. Don’t get me wrong, Aldi drives a very hard bargain, but once you’ve agreed a deal for a year, it sticks for a year. They don’t come back demanding new bonuses, discounts and every other trick.”

“As a result – and this news will not go down well at Tesco HQ – we’ll offer Aldi a better price at the outset. Yes, that’s right: for all its aggressive behaviour and demands for retrospective rebates and discounts, Tesco actually gets charged more than its bitterest rivals.”

The message is clear: If Tesco doesn’t modify its tactics, then those competitors will continue to eat into Tesco’s market share on the back of superior supplier working relations.  Clawing-back credibility and a good reputation from a situation where suppliers have abandoned trust in you is going to be a long journey for Tesco, to be made harder still if that rebuilding of trust is left only to the procurement department.

This piece opened with the phrase ‘an astonishing news story’ but, let’s be honest, it’s not astonishing at all.  For years we’ve known that the supermarkets have pressured suppliers so much that many only stay in business due in part to creative accounting of their own, selling below cost in exchange for getting at least some overhead cost recovery. All of this pressure is predictable and a natural consequence of buyer dominance in a market where the channels to the consumer is controlled by a few big names.  Such channel dominance is but one important lever of power enjoyed by the Tesco buyer, and it sits alongside Tesco’s brand referencability, business volume and supplier dependence, all of which enable Tesco (and the other large retailers like it) to strike a hard bargain in supplier negotiations.

Suppliers that find themselves in such a dependent position with dominant customer ‘partners’ (they are still ‘partners’, aren’t they?) share some of the responsibility for the pain they experience, as demanding customers put the squeeze on their profits.  Failing to develop a wider portfolio of customers and spread the risk is a path taken by too many suppliers to ‘blue chip’ customers. It’s a pattern that’s repeated in aerospace, automotive and assuredly many other sectors.  Over-dependence is an easy trap to fall into, and tough as hell to get out of in the short-term.

But let’s come back to procurement.

What does it mean to be a procurement professional in 2014? The minimum we should expect for professionals in large corporates is that they are intelligent and educated in procurement methods and have an appreciation of what best practice might look like in their sector.  They’re ambitious and see themselves as the ‘custodians of supply chain value’, integrating their category management process with efforts to continually improve performance and value for money through post-contract supplier management (SRM).  Competent in negotiation, they have well-developed influencing and stakeholder management skills, and they know where to draw the line at sharp practices.

Whilst it’s highly likely that Tesco’s procurement professionals tick all these boxes, they are evidently not always walking the talk.  There’s a world of difference to being professionally demanding of suppliers to provide and improve value for money, and the bullying described by the supplier in the Independent article.

The quality of relationships a procurement organisation has with its suppliers do matter – a lot.  Taking seriously the idea of becoming the customer of choice for your suppliers has, again, been proven to contribute to company profitability and business success. The work of Detroit-based John Henke in creating the Working Relations Index (WRI) has reached a point where he and his fellow researchers have empirically proven the link between the quality of a company’s supplier management and its profits.  If Henke’s research is anything to go by, and it is widely respected, then Tesco is missing an opportunity to transform its supplier relationships and certainly enhance its corporate reputation.

I imagine that positive supplier relationship management is far from an alien concept to Tesco buyers. I’m convinced they understand that collaboration, process improvement, and innovation all potentially lead to superior products and services from suppliers, and at lower cost; both total cost of ownership (TCO) and price.  No, I suspect the pressure to bully suppliers is coming from elsewhere in the company.

Tesco is (and has been) under huge pressure from The City, and not only due to the recent overstating of profits. Its market share has dropped from 31.8% in 2007 to 28.8% currently, and it threatens to go lower still as Aldi, Netto, Asda and others go from strength to strength. The pressure on the Board from City investors is intense and the pressure transfer from the CFO’s office to Procurement surely must be similarly fierce.

Typically, Procurement’s Finance colleagues’ focus is not on supplier relationships, becoming the customer of choice, or showing empathy with Procurement’s nurturing of collaboration with key suppliers. Instead, Finance is the custodian of the balance sheet and the P&L, a key player in corporate governance, and the CFO is one of the key faces presented to shareholders. It’s the world of the desperate scramble to hit the numbers, and whatever it takes to secure the commitments made to investors, and it’s not surprising that procurement’s more visionary practitioners are given short shrift by their impatient number-crunching colleagues.

Procurement may be the ones aiming their guns at pressured and disgruntled suppliers, but it’s the CFO’s office that’s usually providing the bullets.

Unfortunately there is no easy solution to the problem of a bullying reputation. Trust between Tesco and some of its suppliers must surely have been shattered, perhaps beyond repair, those suppliers tolerating the occasional abuse in exchange for sales revenue. It will take real intent from Tesco’s procurement leadership and its executive colleagues to improve supplier relations, and it will certainly take time.

More generally, as far as internal relationships are concerned, procurement people should wisely continue the current vogue of engaging more productively with stakeholders, whilst asserting the importance of creating and capturing new value from key supplier relationships. It’s now proven to be a more effective strategy than to ‘simply’ demand price and payment term concessions, on instruction from above.

In pursuing such value improvements, procurement practitioners must hold onto ethical standards of practice, behave professionally at all times, and execute SRM programmes that may indeed be demanding, but importantly, based on optimising supplier collaboration potential and with a decent degree of mutuality.

Educating colleagues on the core SRM principle of recognising value improvements beyond supplier price reductions needs to become an even higher priority for procurement leaders. It’s not exactly a new concept, is it? By taking SRM seriously, leaders can begin afresh the journey towards supplier relationships that deliver genuine TCO value to their organisations. But it’s worth remembering that it can’t be done by procurement alone. SRM is an enterprise-wide competence involving a wide range of stakeholders, and an appreciation of this in the boardroom would surely help most organisations.

Do this well, and suppliers will be far less likely to go complaining to the press.

You can read the full Independent article here.

One thought on "Tesco procurement practices exposed and it’s not pretty"

  1. Matt Knight says:

    Hear hear. Your observations of financial pressures being volleyed from Shareholder to CEO to Finance to Procurement and onto the Supply Chain are well made. Additional complications arise when Procurement report into Finance – there’s little escape. Especially with a backdrop of already brittle Supply relationships. Procurement and the organisation as a whole have a responsibility to represent and support their Supply Chain as if they were their own employees. A demanding emphasis on internal comms and sophisticated understanding of the Supply environment are key characteristics of an organisation (including Procurement) that gets this. Shame it appears this is not echoed in some big corporates who go chasing the dollar quarter on quarter…

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