Procurement can drive prices down – but beware the consequences

- January 21, 2013 1:31 PM
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We commented in a moderately humorous manner last Friday about the horsemeat in burgers scandal. On a more serious note, it really does emphasise the importance of understanding supply chains, and having traceability of components and raw materials in the finished process.

But it also demonstrates what is perhaps an inevitable but unintended consequence of driving prices down, whether to meet a specific retail price point, for simple competitive or commercial reasons.

The UK and Ireland spend a lower proportion of household income on food than anywhere else in Europe. In the UK we spend around  9% of our income on food whilst in Germany it is over 11% and in France over 13%. That’s not because we’re the richest country by any means, (richer countries tend to spend less on food as a %) – rather it may say something about the attitude towards food of a large part of the population. The weekly grocery shop is a necessary evil, the aim is to find cheap products that fill us up and save our money for spending on our Sky TV subscription, more disposable clothes from Primark or our holidays.

Now, I do understand that for some people, money is truly tight and cheap food is a necessity. But even then, that doesn’t have to mean “value beef burgers” at £1.69 for 8 quarter-pounders. That’s 85p per pound (454 grams) of product – what do you really think the quality is going to be like?

My last role in the food industry was running a potato packing and trading business in East Anglia – which may tell you why I got back into blue-chip firms and procurement director roles after that! But I remember the day we got a call from a German discount retail firm who were just opening their first stores in the UK.

Would we like to bid to supply pre-packed 2 kilo bags of potatoes?

Yes, of course we would. We knew about their focus on value, so we really priced very aggressively (we thought) for our lowest quality but still decent potatoes. My sales director called them, and said, “we can do 20 tonnes a week at (let’s say) 40p for a 2- kilo bag”.

The buyer laughed. “We’re going to be retailing them at a lower price than that” he said. And they weren’t joking, and we didn’t get the contract.

So there’s a long history of supermarkets driving down the price of food, certainly at that ”value” end of the market. Whilst  this does have benefits, it also has an inevitable outcome – suppliers down through the supply chain will look to save money, and seek  cheaper and cheaper ingredients, lower specifications,  and some will even be tempted to cut corners in the hope of increasing their wafer-slim margins.

Now when something like this happens, of course the supermarkets will make speeches around how much they care about suppliers, supply chains and the quality issues. But I wonder how many real-life conversations like this go on.

“We need to be selling this product at £1.99 retail. So we need it from you at under £1”.

“We can’t possibly make a margin at that price”.

“Well, either find a way or we move the business – we’ll find someone who can do it”.

So what do you think happens? They find a way… Now I’m not accusing the processors in this recent case of deliberately using horsemeat, but that pressure on cost eventually will make someone in the supply chain think the risk is worthwhile.

And we’ll come back in a follow up piece and look at the really important question arising from all this for our profession –  how can procurement people be aggressive on cost without getting into reputational risk territory and encouraging the wrong behaviour in the supply chain?

 

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Comments

  • bitter and twisted:

    A burger is not 29% horse by accident.

    A should-cost analysis of beefburgers can’t be that hard, can it?

    Sack the bastards.

  • Planbee:

    Or turn them into horsemeat

    In the ‘old’ days (ie before I was born) most shopping would be done locally, and a shop would live or die on their produce being at acceptable quality. If it wasn’t then the punters could go to another local shop. This forced the shopholder to perform a level of QA,

    Where I live, just outside London, there are only two supermarkets in a 10 miles radius, one is Tesco, the other is Waitrose. There just isnt the same level of options to go elsewhere.

    And what local butchers there are concentrate on the high end, high cost end of the market to differentiate themselves. No one can go into the medium price decent quality market as there is not enough differentiation in product to justify the higher price they would be charging compared to Tesco.

    We are reaping what we have (non organically) sown

  • liam:

    Work with the supplier to understand their pressure points, and where their costs are causing difficulty. A fresh pair of eyes can often help to spot opportunity for efficiency.

    Taking a longer term proactive & supportive approach will surely lead to longer term sustainable advantage, rather than using a “take it or leave it” approach.

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