Saturday, September 25, 2004

Supplier Relationship Management

Compass is the world's largest catering company. It runs canteens in many public and private organizations, including schools and offices. In September 2004, it issued a profit warning, reporting disappointing trading and cash flow. The share price fell by a quarter. [chart]

Compass says that the reason for the cash flow problems is that it is now paying its suppliers more quickly than it would like to. Furthermore, a key supplier had got into financial difficulties. We can interpret these as clues that Compass's past profits may have been obtained at the expense of their suppliers. (A common tactic for powerful companies is to squeeze cashflow from their suppliers by insisting on long payment terms: 60 days or 90 days rather than the normal 30 days.)

In the Daily Telegraph (23rd Sept 2004, registration required), Dr James Rieley points out that if a company tries to be tough with its suppliers, then the suppliers will go into "survival mode", thus producing behaviour that appears to confirm the necessity to be tough. There is a closed system loop, in which tough tactics on one side stimulates tough tactics on the other side. When management is trapped in this closed system loop, it appears to them that their options are limited by the tough and uncooperative tactics of the other side: in other words, simple cause and effect. (A similar pattern can be observed when management is tough with employees, stimulating uncooperative behaviour from them: this is known as Theory X.)

Rieley recommends win-win relationships between a company and its suppliers - unless "you want to explain why you had to issue a profit warning because you didn't know what was going on with your suppliers". Who could he be talking about?

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