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?
