Supermarket Buyers Using Suppliers as Cannon Fodder Supply Management - Assignment Example

Supermarket Buyers Using Suppliers as Cannon Fodder Supply Management Affiliation The aim of this paper is to describe the procurement tactic that has been used by large retail firms in UK market. Large retail stores are using their suppliers as cannon fodder and due to this tactic many manufacturing firms which provide products to large retail stores are suffering. This is a game of bargaining power and by using large number of suppliers; the retailers are becoming more powerful in terms of bargaining with their suppliers. In this paper the advantages that these supermarkets are exploiting as well as the disadvantages of this tactic have been described. Supermarkets are engaging to exploit all the possible opportunities and they are doing so, by aggressive purchasing from multiple suppliers (Jennings, 2014). Purchasing from large number of manufacturers gives them power to bargain on price and quantity and due to this power they are generating more profits, whereas food manufacturers are suffering. This price war has raised many questions among marketers and economics, and they are seeing this war as an unfair tactic of retailers which is creating negative impact on the overall supply chain. In today’s dynamic world, companies are not competing with each other in fact their whole supply chains are competing and retailers are creating trouble for the supply chains of different manufacturers (Bolton, Shankar, & Montoya, 2010). Additionally, many economists believe that a supply chain is as strong as its weakest link and retailers are weakening the supply chains of manufacturers by demanding heavy contribution from them and by aggressive purchasing. For nearly last two decades large retailers are engaging in aggressive buying practices from multiple suppliers and these practices have created bloodiest price war in UK market (Jennings, 2014). Due to mistreatment of retailers with their suppliers many manufacturers have become insolvent, and if this unfair practice goes on in the future it will create many potential problems for the manufacturers. Potential Advantages for Large Retailers The tactic of aggressive purchasing and using of suppliers as cannon fodder seems unfair for suppliers but this tactic gives potential advantage to large retail stores, which facilitates consumers from their services and availability of hundreds of products under one place. Following are some advantages that large retailers are exploiting by using this aggressive tactic. 1. Bargaining Power Bargaining power refers to the ability to gain advantage of most favourable price under prevailing market conditions. It can also be described as having strong competitive position in the market and due to this position one party gains advantage to win negotiation over another party (Nicholson, 2012). Large retail stores are in a strong position and due to their position they have strong bargaining power. They bargain well in terms of price and quantity with food manufacturers and this bargaining is somehow good for consumers. Supermarkets provide number of products to their customers at reasonable prices, and to serve the customers well they must have strong bargaining power over their suppliers. Additionally, supermarkets purchase in bulk quantity and bulk purchases give them advantage of economies of scale, due to heavy purchases they gain advantage of bargaining power over food manufacturers (Bolton, Shankar, & Montoya, 2010). 2. Products with more variety and affordable prices Since large retailers are purchasing with multiple suppliers, this means they are engaging in procurement of different variety products with affordable prices. This is one of the greatest advantage large retailers are exploiting from their aggressive purchasing tactic. This policy is not only beneficial for supermarkets but also for consumers. Consumers always demand variety but at affordable price and supermarkets are successfully satisfying the needs and wants of their customers. For last two decades large retailers are buying products from multiple manufacturers and this means they are purchasing variety products. Since they serve hundreds of customers on daily basis so they require multiple variety products for satisfying their customers. Moreover the reason behind the success of large retailers like Wal-Mart, Ikea, and Tesco lies in their efficient procurement strategy that is based on bulk purchasing at affordable price from different manufacturers (Nicholson, 2012). These large retailers never rely on few manufacturers as they procure products in bulk quantity from multiple suppliers and serve their customers in effective and efficient manner. 3. No risk of suppliers’ consolidation As UK’s large retail stores engage in heavy purchasing from multiple suppliers this means there is no risk of suppliers’ consolidation in UK’s market. Suppliers are fighting to acquire place on the shelves of large retail stores and by doing so they are struggling hard against each other, therefore they will not make any consolidation. The tactic of purchasing from multiple suppliers adopted by retailers has created a strong competition among suppliers and this tactic lowers the risk of suppliers’ consolidation. 4. Timely availability of products Timely availability of products is necessary for supermarkets because hundreds of customers visit supermarkets on daily basis. Purchasing from multiple suppliers ensure the availability of products on time. UK’s supermarkets buy products from different suppliers and this procurement strategy ensures timely availability of products. Potential Problems Along with many advantages, the procurement strategy of UK’s large stores has some potential disadvantages which have gained attention of some advisory and regulatory bodies. 1. Insolvency among food manufacturers Over the past years, insolvency among manufacturers especially food manufacturers has sharply risen. The reason behind this sharp increase of insolvency is aggressive purchasing tactic of UK’s large retail stores. According to Duncan Swift, head of the accountancy firm Moore Stephens, Supermarkets are creating bloodiest price war and are putting heavy pressure on food producing companies. Heavy pressure and competition is the main reason behind their insolvency (Butler, 2014). Food manufacturers are losing their power and their profit margins are declining due to unfair purchasing policy adopted by large retailers. 2. Compromise on quality Another potential problem that could arise due to unfair practices of large superstores is compromising on quality, in order to save the business from insolvency and to gain profit it is possible that manufacturer will reduce their cost by compromising on quality (Nicholson, 2012). Poor treatment from retailers has left no choice for food manufacturers except to save their businesses by reducing the cost which somehow affect the quality of products. 3. High Legislation on Superstores If large retail stores continue their unfair practice for some more time then there is a potential threat that legislative body will increase regulation on their businesses. This unfair practice has been noticed by the media and media is trying to raise this issue in front of UK’s legislative body. Last year UK’s government has appointed a grocery code adjudicator to monitor the purchasing activities of large supermarkets and fine those stores who violate the rule and misuse their power (Stones, 2014). Moreover, government will impose more regulations of retail business because insolvency of many food suppliers has very adverse impact on UK’s economy. 4. Raising popularity of discounters As supermarkets are continuously creating pressure on food manufacturers, there is a possibility that they will sell their products via discount retail stores. Growth of online purchasing and high-street convenient stores is creating a potential threat for large retailers. Moreover, discounters are gaining popularity in UK’s market and are slowly capturing the market share; therefore these structural changes in the market can create many problems for large retail stores in the long-run (Butler, 2014). Every strategy has its own advantages and disadvantages, the policy of aggressive purchasing adopted by UK’s major retail stores also has its own pros and cons. The tactic seems beneficial for large retailers but in long it will not only harm them but also the economy of the country. In order to protect food manufactures UK’s government should take serious action against giant retailers. Reference List Bolton, R. N., Shankar, V., & Montoya, D. Y. (2010). Recent trends and emerging practices in retailer pricing. In Retailing in the 21st Century (pp. 301-318). Springer Berlin Heidelberg. Butler, S,. (2014). Supermarket price war turns smaller food suppliers into ‘cannon fodder’, The Guardian (Food and Drink Industry). [Online]. Available at: http://www.centromarca.pt/folder/noticia/ficheiro/2122_5_20141127theguardian.pdf .(Accessed Feb 28, 2015). Jennings, A., (2014). Cannon fodder suppliers being pushed to the brink, European Supermarket Magazine. [Online]. Available at: http://www.esmmagazine.com/201411254574/Supply-Chain/Cannon-Fodder-Suppliers-Being-Pushed-To-The-Brink.html. (Accessed Feb 28, 2015). Nicholson, C. & Young, B. 2012. The relationship between supermarkets and suppliers: What are the implications for consumers?, Consumers International, London. Available online from http://www.consumersinternational.org/media/1035307/summary,%20the %20relationship %20between%20supermarkets%20and%20suppliers.pdf (Accessed Feb 28, 2015). Stones, M., (2014) supermarket suppliers ‘are cannon fodder’, Food manufacturer.co.uk. [Online]. Available at: http://www.foodmanufacture.co.uk/Manufacturing/Food-firms-have-become-cannon-fodder. (Accessed Feb 28, 2015). Read More