To Be or Not To Be Ethical – In Defence of Food Buyers

Professor Andrew Cox, founder and leader of the International Institute for Advanced Purchasing & Supply, Chair of its Advisory Board, ex Birmingham University professor and procurement guru, brings us this excellent response to a recent Spend Matters article on "the sheer stupidity of 'supplier bullying.'”  And I think he has just given my colleague Peter Smith a C- for his piece of work ...

Peter Smith (Bullying Suppliers – Unethical and Stupid) raises some interesting points about the ‘unethical and stupid’ behaviour of food buyers. He reports the recent supplier leverage strategies of Tesco, Sainsbury, Premier Foods and 2 Sisters as evidence of ‘bullying tactics.’

While this may explain Peter’s own ethical position, which he would also like to see CIPS (and presumably other Purchasing Associations?) institutionalise (or at least take a position on) as unacceptable behaviour, my view is somewhat different.

For something to be ‘unethical’ it must be contrary to an agreed set of moral/ethical principles. It is not clear at all, however, what set of business practices by food companies Peter is suggesting are in breach of ‘ethical’ behaviour — unless he (and others of a similar disposition) means that buyers and suppliers must never seek to change the terms of a contract during or, in some cases, even after a contract has been terminated?

Clearly, if a food buyer asks for a rebate, or finds a legal mechanism to delay payment terms, or asks suppliers to provide a financial payment to remain as a supplier, they are attempting to use more aggressive leverage.  It is not clear, however, why any of this is ‘unethical.’

The uses of ‘within-contract’ and 'post-contract’ leverage by buyers is a common practice (and not just in the food industry).  It is normally brought about by an unexpected change in the power position of the buyer. A typical example is when there is an unanticipated increase in its own market competition, undermining the buying company’s financial position. This obviously explains a great deal about the causes of recent and apparently more aggressive behaviour by food buyers.

The problem with calling these practices ‘unethical’ is that suppliers are not averse to doing exactly the same thing when power shifts in their favour during a contract. When customer or market demand unexpectedly outstrips supply many suppliers will often ask for price increases to ensure the same level of quality/service previously agreed contractually.

Calling these practices ‘unethical’ serves little purpose because history shows that buyers and sellers always tend to be opportunistic in the face of unanticipated shifts in demand and supply. There is an old aphorism that is perhaps helpful here: “First comes food, then morality.”

Since business relationships are not (nor could they ever be) governed by any nationally or even internationally agreed set of enforceable ethical/moral principles, the major protection for buyers and sellers in markets is that their agreements are protected and governed by legally enforceable contracts, that assign rights and responsibilities to both parties. These can be defended and ultimately challenged in the courts if either party is in breach of the terms of the initial agreement.

Therefore, if a buyer attempts to leverage suppliers more aggressively during, or after, a contractual term, a supplier is completely free to either challenge it (and take the buyer to court if they are in breach of contract), or accept it, and get on with the job.  The same legal rights are afforded to the buyer if the supplier leverages them during, or after, a contract.

Presumably, if either party to the agreement tolerates increased leverage it is because — lacking sufficient power and leverage resources — they do not have any better alternatives, and must provide better value to the buyer or supplier in order to retain the relationship.  This has nothing to do with ‘ethics’ but, as Peter intimates, everything to do with power in business relationships.

It is worth concluding with the thought that if food buyers are able to use ‘within-contract’ and/or ‘post-contract’ leverage to extract more value from suppliers, then are we not really witnessing more effective (competent) negotiation by buyers who historically (in the good times) had ‘left something on the table’ with their suppliers?

In this light it could be argued that the current press and media blitz on ‘ethics’ in food supply chains is really nothing more than a skilful attempt by food suppliers to provide themselves with an ‘ethical’ bargaining chip (power lever) in their negotiations with buyers. This is surely nothing more than ‘the rules of the game.’

Unfortunately, whatever one thinks about these practices ethically, what they actually demonstrate is a failure by some food companies to appreciate fully the power and leverage circumstance that they are in, thereby leading to the pursuit of potentially misguided (and ultimately ineffective) sourcing and relationship strategies.

In this light the aggressive short-term sourcing strategies condemned by Peter and others (Four Pillars’ David Atkinson for instance), 2 Sisters, Tesco, and now, beans and beer giants Heinz and AB InBev are examples of buying companies that have failed fully to understand some of the key factors that must be considered when using power and leverage with suppliers. Such failures — rather than ‘unethical’ behaviour—  are more likely to put at risk the search for improved value for money, that is likely to be necessary if food companies are to remain competitive in the future.

How these competence gaps can be eradicated will be subjects for the future.

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Voices (10)

  1. Sanjay Chaudhuri:

    Glad to hear comments that are innately a basic practice in India & across Asia.
    As they say in India, “Sastha & Tikao” (cheap & long living) is a very common and popular expression, while similar sentiments flow across Asia when it comes to buying, “a win win situation….all”
    Therefore, it may be well advised to strategies and look to leverage a “situational or positional” bargaining /buying tactic from where it is comfortable to drive the change (terms).
    Every buyer has the right to approach a supplier to change any terms even when the supplier has qualified as the lowest bidder during a RFx process, and sometimes even after the contract is in vogue. There is truly nothing unethical about it and a commonly seen practice in all of Asia.
    The process of seeking additional discounts or change in terms completely depends upon the paradigm shift in demand & supply landscape, customer behavior, competition: business growth or degeneration, frequency of supply, volume, tenure and the relationship that has been built between the buying and supplying entities.
    There could also be a Geo-economic factor imposing in Asia where there is natural shortage of Supplies and lower standards of living within the larger masses.
    Suppliers & Buyers are always waiting for an opportunity to earn / save the extra dollar especially if it is post contract terms, given the weak socio economic surroundings and the old saying “Food comes ahead of Morals”.
    Till about 5 years ago, the bargaining stretch in China could go as high as 80%, whereas India still maintains a minimum 20% stretch and could go up to 50%.
    While the basic buying rules remain the same, there is a distinct difference in the buying pattern and thought process between regions across the world. I’ve personally broken down many Global Contracts (US pricing) and have re-established a much lower pricing for each APAC country during the course of a globally Live contract.
    While we remained committed to the supplier in terms of preferred supplier and continued to feed him more business, it was important to review global economies and prices to keep the leash on. While many may find it difficult to believe, a simple change in internal business policy leading to increased demand of goods and falling currency in APAC made it possible.

  2. Andrew Cox:

    I expected some interesting debate about my article and readers have not disappointed.

    There is obviously a great deal to say about the issues raised by readers and I will be explaining the key issues in another article shortly. In the interim one or two simple comments tor those who take issue with my position on this:

    1. While one disgruntled supplier may cost a buyer some money a buyer also has to consider the more important issue of the impact of not getting the best deal they can for all of their prospective customers, and in the light of their competitors pricing. Losing one customer is one thing; losing all customers through uncompetitive buying is another.

    2. The discussion about ethics and its impact on customer behaviour is important because it potentially gives a power lever to suppliers in their negotiation pre-contractually . Of course this power lever does not exist for all suppliers, because not all of them have products/services that are bought directly by customers. This means that we need to segment the force of ethics as a power lever between particular types of buyers and suppliers in supply chains. Clearly this is not being done by the companies in question.

    More to come on this and other segmentation issues in a follow up article.

  3. Dan:

    Ethical behaviour is determined by society at large. One particular group within that society cannot decide what is ethical or not, nor is ‘everyone else in the trade does it’ a valid justification – look at the furore over bankers behaviour. I will, however, admit that there is a fine line between a legitimate use of power, and abusing that power, and that line is subject to change as society’s morals change over time.

    In any case, you can’t separate ‘ethics’ from ‘legitimate business practice’, as they are one and the same – if a business is deemed to have acted ‘unethically’ in the eyes of its customers, it’s unlikely to stay in business for very long unless it’s behaviour changes to match society’s expectations.

  4. Ian R:

    On top of that, many of these suppliers also produce the own brand alternatives, albeit I imagine under different contract arrangements, but could they afford to lose supply of persil and the own brand version.if they fell out with Unilever as an organisation

    1. Peter Smith:

      Good point, but that is the key reason why some of the big branded firms – I know Mars and Kelloggs are two of them, not sure about Unilever – refuse to do own label so they can preserve their own brand uniqueness. Again, Andrew Cox would have a view on this as a route to maintaining power.

  5. Paul Wright:

    Peter will know better than me, but from my dated and second hand experience, yes they do. And the big suppliers get equally aggressive back, and (threaten to) take their products off the shelves until it is all sorted. The argument is that a supermarket cannot do without Coke, Persil, Hovis, PGTips etc.

    1. Peter Smith:

      That is exactly right. when I worked for the firm, Mars didn’t take too much nonsense because they needed Mars Bars, Twix etc on the shelves. And according to Panorama this week, Tesco had a big row with L’Oreal last year which it sounded like L’Oreal “won” – because they had the brands that Tesco could not afford to de-list. Professor Cox would describe it in terms of the power factors better than I could but it isn’t hard to see which suppliers have some power and which don’t!

  6. Bitter and twisted:

    I wonder, do the supermarkets try this with the big suppliers – the nestles, heinzes etc ?

  7. Paul Wright:

    Far be it from me to agrue with one of our leading thinkers, or even two in Peter and Andrew, but rather than focussing on the ethics issue should we not be considering the contractual issues, and also the practical consequences. I agree that there are no universal ethics, so lets first think about the cotract. I dont know the details but as described a buyer taking receipt of goods and services, then refused to pay as per the contracted terms. They may be relying on the power of their lawyers to deflect suppliers from legal action, but they are not making themselves an attractive customer. The power of the buyer always increases after they have taken possession of goods, but abusing that position will surely lead to “risk factor” pricing, a reduced supplier base and possible legal action and bad press. What was the financial saving, and what were the finacial implications of the press coverage (it may have been positive as a sign of aggressive cost control, or negative)? And surely we do not want to encourage breaking of contracts, and payment terms would be expected to be a material term leading to breech. The buyer may feel there are enough suppliers out there that they can “burn” through them this way – but has that been tested? Or is it a “wizzard wheeze” from the finance department that Procurement are reluctantly having to follow. Never mind the ethics – does it work in both the long and short term?

  8. James Mahon:

    What a load of theoretical baloney!
    Whether it is ethical or not, according to the dictionary definition of ethical, is purely for the academics. Whether it is professional, gentlemanly, etc. i quite another discussion.
    To me, however, this practice is just plain stupid. They say “people buy from people”. Well, the same is true in reverse… “people sell to people” and having spent 20 years as a supplier to multiple industries, Retail always stands out to me as being by far the most aggressive. Consequently, I go into every bid with a retailer with a price premium and fully prepared to countershaft them as they try to shaft me. In other industries, I go in with a smile, a good price and my best ideas. So to the point that suppliers are quite prepared to be “unethical” when the power tide turns… damn right we are, we have been conditioned to behave like this by years of pig thick retail buyers.
    I think retailers also tend to forget that in many instances, their suppliers, and the families and friends of their suppliers, may also be customers. I remember buying my first house shortly after being treated like dirt by the then CPO of Comet. Where did I buy my washing machine, fridge freezer, tumble dryer, television, etc. then? Not Comet.

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