Invoice deductions are the bane of suppliers. They can poison relationships between suppliers and their customers and eventually cause irresolvable damage. On the other hand, retailers have a limited set of tools at their disposal to help them enforce compliance with the conditions established for the purchase and delivery of products. How is it possible to keep an otherwise profitable relationship from becoming adversarial because of relatively small issues?
Incentives (both positive and negative) don’t start out as problems. They are usually baked into sales agreements as part and parcel of the methodology of doing business together. Both parties agree that certain processes and conditions need to be met in order for the relationship to be and remain mutually beneficial. And while suppliers have control of how closely they monitor and comply with the conditions, retailers are in control of the financial side. This puts the retailer in a position of control, in which it can become easier to simply trigger a deduction rather than dig deeper for a solution.
In general there are three reasons initial compliance incentives go askew:
1: Suppliers can follow instructions, but when the specifics are not contextually understood they may make small changes to the way they implement them. Those small changes may be intended to make their integration processes simpler, but end up causing them to become non-compliant.
2: Margin pressures are everywhere and suppliers may feel that if they share internal processes and rationale, they may expose themselves to additional pressure from their customers to reduce prices.
3: Compliance incentives, both positive and negative, don’t translate in the ways they were designed. The tactics initially put in place may become counterproductive due to changes in the competitive landscape or in other operational conditions.
While every out-of-compliance instance has specific reasons and conditions that caused them, all three of the above problems have their root in lack of communication. It isn’t enough for the retail buyer to talk with the supplier’s sales rep. Many times, problems may be caused by smaller issues along the way that don’t come to the attention of management until the end results trigger some kind of negative action.
When suppliers are given a set of rules to follow, it’s easy enough for them to agree to abide by those guidelines. As they move forward and implement the details, several people participate in the effort—and even with the very best minds and intentions, interpretations of just how things are done can miss the target. It isn’t always possible to avoid these missteps and their consequences, but increased communication can go a long way toward synchronizing requirements with actions.
Providing visibility through supply chain digital processes can help open the doors to understanding. For some suppliers, that means providing tools like POS transaction details. If register transactions are provided in a timely manner and with the right analytics tools, savvy suppliers can predict trends, adjust schedules, and even provide insights that the retailer doesn’t have time or resources to discover.
Process insight is a two-way street. Most retailers, though, are simply not interested in the internal workings of their suppliers—just that they perform up to specification. In addition, suppliers may be reluctant to open their processes to their customers, assuming that if the retailer knows what’s going on inside their operation they may use that knowledge against them in order to pressure for lower pricing. There’s no way to guarantee against this kind of tactic. The only assurance likely to encourage a supplier to open up and fully disclose their inner workings is the establishment of a trusting relationship.
Communication between trading partners should take into account more than just the ‘how’ of retailers’ operations. In order to truly collaborate, suppliers need to also know the ‘why’ and the ‘when.’ If the retailer needs product packaged in a particular way, letting the supplier know why it’s important to the operation and what part the packaging plays in increasing sales and lowering expenses can be vital.
The same goes for promotions and special offers: letting the supplier know what kind of promotional efforts are coming up and how the retailer intends to handle them not only provides information that allows the supplier to be proactive in their actions, but suppliers may also be able to provide internal information that can help increase the promotion’s effectiveness.
Incentives need to be tailored to the needs of the business trying to maximize their profitability. This includes both the retailer and the supplier. When incentives are properly positioned and carried out, positive results can be predicted and achieved. Having negative incentives available either as threats or actual prods to be used when guidelines are not followed is a necessity, but a necessity that should be used sparingly and only after discussion and mutual understanding of all the conditions that cause them to be called into play. Best practices mean making the most of the trading partner relationship so that both sides contribute to each other’s success.
-Daniel Ford, DiCentral