Suppliers foot the bill - again

I hear that Somerfield is aiming to increase its suppliers' cost to serve. The retailer's proposition allegedly consists of a target to cut stocks, improve availability and reduce overall supply chain costs. Suppliers who do not play ball will have all minimum order quantities removed from their systems and Somerfield will order exactly what it needs, as and when it needs it.

It is ludicrous for any retailer to threaten publicly to break its agreements on order size if suppliers do not accept a change in supply chain design. If I were a manufacturer, I would be most aggrieved by this posturing. The cost to the manufacturer of breaking such agreements can be significant. It costs the same to deliver 22 pallets as it does to deliver 26 pallets (a full load), so a fall of four pallets per order, for example, would cost the supplier a 15% increase in the unit cost of transport.

It costs around 10p to pick a case. If Somerfield starts ordering picked cases instead of full pallets, the supplier will lose a further 10p per case of margin.

I wonder why Somerfield needs to threaten in this way? I thought only Tesco could get away with that now! Maybe Somerfield's proposed alternative to the present way of doing things does not hold water as a way of reducing total supply chain costs. You know the retailer's story: "Let's work together to save money, I'll take 110% of the benefit and you can have what's left!"

Even Sainsbury has learned that you cannot create beneficial change by bullying suppliers - the big suppliers are too well prepared and the small ones are too small to create the required benefit to the retailer.

I think this latest of many such skirmishes creates yet another reason why manufacturers must understand their cost to serve and be prepared to give a firm 'No!' to propositions that are designed to increase supplier costs at the same time as saving retailers money. I note without much satisfaction that Tesco is rumoured to be reducing the level of factory gate pricing because it simply cannot meet any sensible service target at a cost it can afford.

It would have been nice to start the year more positively, but, it's not my fault, honestly!

Tim Knowles is partner at supply chain consultancy TKA. Contact him at gvz.xabjyrf@cebnpgvirybtvfgvpf.pbz​