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Sell to us cheaper and wait longer for payment, demands Fonterra

Mark Simpson

A recent article on Stuff reveals that New Zealand dairy giant Fonterra are telling suppliers they must “share the pain” of its farmer shareholders by slashing their prices by 10% and waiting much longer for payment.  Those suppliers who are not dependent on Fonterra business will likely stick two fingers up to the co-operative, depriving it of presumably good suppliers of goods or services. Many of those who can’t afford to walk away will no doubt feel pressured to accept.

Presumably as large player, Fonterra had already used its muscle to negotiate both good pricing and payment terms from its suppliers. If not, its shareholders should be asking their board and management – “Why not?”

Are these negotiation tactics appropriate given the volatile market Fonterra finds itself in, or simply “bully boy” tactics, commonly used by people and organisations that believe they have the muscle and power to force others to accept their terms?

We’ve witnessed innumerable examples of these negotiation tactics being used worldwide. Tesco, the UK supermarket group having monstered its suppliers into doing its bidding finally realised it was a somewhat hollow victory when the hidden long term costs of the approach came to far more than their initial “savings”. They are now offering better terms to suppliers in an attempt to rebuild relationships in a spirit of “Transparency and fairness” (and reduce those hidden costs!) Our UK colleagues wrote about this recently.

Some short term savings will be achieved but inevitably these will come at the expense of greater cost to the organisation in the long term. Many of these costs Fonterra won’t see up front but they’ll be hit with them none the less. They will come in the form of compromised relationships, quality (can Fonterra stand any more issues in this area?) and service.

A better solution would be to talk to their suppliers openly, honestly and to explore opportunities to reduce costs for all parties together. Is 10% appropriate across the board? Some suppliers may have far more flexibility that others, if they explored the relationship. 10% might be at the lower end of the savings scale for some, while others might go bust if they reduced their prices by more than 2-3%.

How should Fonterra suppliers respond?

Firstly they should recognise that they are potentially in a more powerful position than they think they are and Fonterra would like them to believe they are. If they already have contracts in place these could obviously be legally binding but will also be in place for a reason. Presumably because that was the best product, service or deal that Fonterra could negotiate at the time. Their threat to go elsewhere may well therefore be a hollow one.

That said, as good suppliers, who presumably wish to maintain the relationship they have with Fonterra going forward, they should appreciate that the world has moved for Fonterra and they should try and assist them if they can.

They ought to explore Fonterra’s specific needs, ie what’s driving their proposal (demand). There could be other, more creative ways for them to support their customer – without simply giving the farm away (pun intended).

In particular, we would suggest that they consider an important question: “Under what circumstances can we do as they ask?” If there are circumstances under which they can give Fonterra what they’re asking for they should do so, but trade for something in return.

Struggling to think of what to ask for in return?  If you can’t think of anything then why not use time as a variable?

How about this. “You’re asking us to reduce prices by 10% and extend our normal payment terms from 30 to 90 days because the Farmgate Milk Price forecast has fallen from $5.30 (Sept 2014) to $4.60 (Sept 2015).

If you will agree in a legally binding contract to (1) re-instate current pricing and terms once the Farmgate Milk Price goes back to $5.30 and (2) increase the price you pay us by 10% and reduce payment terms to 14 days once the Farmgate Milk Price goes above $6, then we would agree to what you are asking for now.”

Give them what they want on your terms. Put a price on demands. Good long term partners are prepared to share the ups and downs. Question is – will Fonterra?

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