How to avoid the ‘race to the bottom’ and mutual destruction

The recent news about Coles and Woolworths being taken to task by the ACCC for their questionable dealings with suppliers has highlighted a major problem plaguing customer-supplier relationships.

Barrett’s first Sales Trend for 2015 is ‘race to the bottom’ because of the drastic impact this unsustainable pricing strategy is having on sales and buyer relationships. Edward Rayner, a procurement specialist gave us important insights into this major issue and presented some important questions and strategies sales teams can employ to help avoid mutual destruction. Here are some of Rayner’s findings.

A customer-supplier engagement strategy that relies solely on leveraging volume and market size to generate margin will inevitably drag suppliers down in a pricing race to the bottom.

Ominous signs of suppliers caught in this race to the bottom

The ominous signs that many suppliers are caught in this race to the bottom was evidenced in recent press articles about Coles and Woolworths and included:

1. Demands for price drops with no discussion of joint cost management strategies;
2. Constant reminders that “we can get this cheaper elsewhere”;
3. Repeated informal quotations or information quotation processes;
4. Ongoing transfer of risk from buyers to suppliers; and
5. Repeated changing of suppliers.

Rayner sees too many broken companies and suppliers who together have engaged in toxic races to the bottom by pushing down prices lower than the supply chain can accommodate.

Being caught in this race has ensured that suppliers are forced to choose between:

• Lowering the cost of supplying either by accepting their own risks or lowering quality;
• Subsidising the cost of supply by relying on other higher margin customers; and/or
• Withdrawing from the relationship.

In 2014, Rayner saw increased evidence of organisations reaching limits on the value of strength and size as mechanisms alone to reducing their cost base.

In the construction sector (both infrastructure and resources) he says there is lower appetite to ‘buy contracts’ (i.e. deliver projects at below cost) in order to keep the workforce engaged whilst waiting for better times. The costs of maintaining size are beginning to be felt.

The loss of the automotive and refining sectors is well documented and the true impact is yet to be felt. Both sectors were strong dominant players locally but could not adapt to the efficiencies of the global market.

The agriculture sector will be further integrated with global markets through Free Trade Agreements. Suppliers to this sector now have to further adapt to align with the needs of consumers in other parts of the world.

Rayner says that unprofitable supply chains can only deliver risk and failure to those who depend on them. And this race will intensify in 2015 for companies which have relied on price reduction as their strategy for survival.

The adaptable survive

Darwin teaches that it is the most adaptable entity, not the strongest or largest which will survive.

2015-16 will demonstrate that the cost cutting of 2011-14 can go no further; suppliers will not (and cannot) continue to maintain unprofitable prices initially offered to win contracts.

In short, it is best to avoid this race at all costs.

We cannot cut our way to growth, profitability and sustainability in the short or long term. To survive and thrive it is essential that buyers and suppliers work together find a fairer exchange of value to avoid this race of mutual destruction.

Five questions to ask your customers if you want to avoid mutual destruction

If you are a supplier we suggest you ask five reasonable, mature questions of your customers that will reveal whether they intend to drag you along in a toxic and self-destructive race.

1. What is your risk management strategy for this category?
2. What other activities are you undertaking to reduce the cost of this category?
3. What plans do you have in place if our supply fails you?
4. How is your organisation diversifying its revenue?
5. What is the relationship between your organisation’s profit margin and the price you expect to pay for this category?

These questions will steer the conversation away from a sales pitch to a mature discussion of compatibility and long-term value creation. How your customer engages with these questions will indicate what type of customer they are, or will turn out to be.

In today’s hyper-competitive world, profiling your customers to identify how adaptable and reasonable they are may give you comfort that you have partnered with an adaptable organisation capable of both surviving and thriving. Alternatively it may indicate that your organisation cannot sustain this race and you can start work on diversifying and adapting in 2015.

Not every client is a good client. It may look prestigious having a big brand name on your client page but at what cost to you and the longevity of your business?

Remember everybody lives by selling something.

Sue Barrett is the founder and chief executive of Barrett Consulting Group and SalesEssentials.