Premier Foods and a questionable procurement strategy

The financial results and presentation last week from Premier Foods, one of the UK’s largest food manufacturing firms, contained a couple of points that were noteworthy from a procurement perspective.

The firm announced that they plan to “halve its 3,300 suppliers by the end of next year”.  They gave examples of where supplier reduction would be sensible, pointing out that they have 77 catering suppliers, when they “know we don’t have 77 sites that need significant catering facilities”.

That sounds logical, although they may discover that the 77 includes event catering, vending machines, or food processing equipment supplied by a catering firm when they dig into it. But I’m always wary when organisations quote numbers and targets like that. The optimum number of suppliers for any organization should be the outcome of the set of category, product and supplier strategies that are implemented across the business. Setting arbitrary targets like “half our current number” for suppliers is targeting an outcome that may have no linkage to performance.

Indeed, we might hypothesise that in some spend areas, Premier may not have enough suppliers to generate real competition, innovation or supplier performance. The danger of setting targets is that it results in simplistic supplier reduction programmes from procurement, rather than a considered strategic approach.

The other worry was the comment (from the Times):

It  (Premier) confirmed yesterday that it also had asked suppliers willing to support the group to pay money, based on a percentage of their annual billings to Premier, into a new fund that invests in the company.

This looks suspiciously like the old “give us 2.5% off invoice or we will stop dealing with you” approach, so beloved by certain retailers (that sector seems to be the main user of this technique).

There are of course a number of issues with this approach. For a start, Premier’s more powerful suppliers will tell them to get lost, with no benefit except a poorer relationship. Then those that do feel pressured into compliance will look to get their margin back in other ways. A small degradation in product quality perhaps? Less aggressive bidding in the next e-auction? Restricting supply to Premier next time there’s a shortage?

But the most disappointing thing with this approach is that it treats suppliers as simply a cost to the business rather than an asset. On the sales side, Premier are trying to establish powerful brands to counter the power of the retailers. Could suppliers not help them achieve that strategic goal? Surely, very few of their products compete at the low price end of the market, so why is the procurement strategy seemingly focused so much on just that factor?

Suppliers should be helping Premier to innovate, to drive the brand image, to establish their products as high quality (compared to own label for instance), and to reduce cost through the whole supply chain. Beating them around the head with demands for price reduction is not an encouragement for that sort of collaborative behaviour. There is a place for simple cost reduction in procurement of course, but it should be just one of a number of tools for firms like Premier, we’d suggest.

For a firm that has won CIPS SM Awards, it seems a disappointing procurement approach to be taking.

First Voice

  1. paul:

    CIPS award – is it the same management team as when they won the award, or a new broom sweeping clean?

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