By Oliver Balch | November 18, 2015
Majestic Wine this week announced the removal of its chief buyer after its pre-tax profits dropped by almost half. Supply chain relations at the ailing retailer have been tense ever since it asked suppliers to stump up cash towards its new warehouse.
Regrettably, such practices are all too common. Global brewer Carlsberg is also facing animosity from suppliers after following the likes of Diageo, Halfords and Mars and extending its payment terms to 93 days.
These kind of tactics of big business towards their suppliers have become a standard feature of today’s cutthroat marketplace, where price is king and any means of reducing costs is valid. Supermarkets are past masters of the supplier squeeze as the sight of striking milk producers earlier this year showed.
Bad relationships are not just about negative publicity, but also impact on the ambitious sustainability targets many companies are now setting themselves. Take climate change. Up to 90% of the greenhouse emissions linked to a companyare generated outside its immediate operations, with the lion’s share often occurring in its supply chain.
To date, big businesses has characteristically operated in a top-down manner. Buyers issue supply firms with codes of conduct and environmental targets, and oblige them to comply. The result is a cat-and-mouse game between suppliers and the armies of social and environmental auditors sent out to verify their farms and factories.
Not only is compliance difficult to achieve (especially among sub-tier suppliers), but it’s only half the battle. A more effective solution is if companies and suppliers worked together on new ideas and R&D.
And arguably, despite their large research and development budgets, it’s not multinational companies that are best set to innovate; it’s the smaller, more agile firms that supply them. So how can companies looking to become more sustainable tap the creativity of their supply base?
The first and most obvious answer is to cut the double-messaging. Corporate buying teams still frequently speak a “different language” to those charged with pushing sustainability, says Nina Jatana, marketplace campaign manager at membership group Business in the Community (BITC).
“There’s an issue that in the buying process”, says Jatana, “
Of course, price, quality and consistency will always feature in procurement decisions, but social and environmental considerations need to be factored in as well. One company looking to implement such an integrated approach is Marks & Spencer, which prohibits its buying teams from purchasing any product that can’t meet at least one goal of its sustainability plan.
Even then, suppliers see such stipulations as a box to tick. To go beyond this, suppliers need to be incentivised. New ways of working rarely spring out of thin air: they need time, resources and dedicated attention – all of which are at a premium for small suppliers.
In the case of M&S, which operates a rating scheme for its key suppliers according to their sustainability profile, the retailer says that its procurement spend with top performing firms is growing at twice the average rate. The business rationale is that such suppliers are not only greener, but more resilient and better at problem solving.
BT’s annual Game Changing Challenge provides another example of incentivising supplier innovation. The initiative works on a Dragon’s Den-style model, with BT inviting firms to pitch innovative product ideas that promise to help it meet one or more of its stated sustainability challenges. BT ensures the winning ideas are taken to market.
The telecoms giant is currently rolling out a software solution that will reduce its transport-related emissions by optimising how it gets its equipment to and from consumers. The innovation was the idea of recent Challenge winner ADVA Optical Networking, a Munich-based technology firm.
A more trusting relationship
Such competitions are spreading, but ideally buyers should be co-investing in the long-term research and development of their key suppliers, argues Mike Pitts, head of urban living and built environment at Innovate UK, the government-backed innovation agency.
“There’s definitely a race out there to be second among businesses in all sectors,” says Pitts, noting that unfortunately many large companies focus their R&D on short-term challenges and would rather sit back and wait for proof of concept than stump up the cash for solutions that may well fail.
Ultimately, talk of sustainability-focused supply chain innovation will only ever begin to take effect when the breakdown in trust between suppliers and buyers is resolved. That requires a shift from a model based on adversarial brinkmanship to one of mutual interest and transparency.
The more open and honest a corporate customer is about its sustainability challenges, the higher the chance of generating innovative solutions, says Claus Pedersen, head of sustainability at Novozymes, a Danish biotech firm that counts Unilever, P&G and M&S among its clients: “This environment facilitates a lot of good, fast results as opposed to a more sceptical, closed attitude between buyers and their suppliers”.