Supply chain management – How David and Goliath can get along

When a small firm supplies a giant, the imbalance of power can lead to bullying. But there are ways to manage such asymmetric relations to the advantage of both parties, says Simon Webley

When a company like Ford is forced to close a car plant for a day because a major supplier refuses to deliver critical parts in protest against pressure to cut prices, you have to ask what is going on. Ford says it lost 400 cars – and it pulled back from trying to force a price cut on the supplier.

Until recently, the focus of media reports on company relations with suppliers has been on health and safety standards, child labour and wages at overseas plants making products to be sold in western markets.

A series of big names have been rightly vilified for procuring such items as clothing, footwear and toys to sell profitably without bothering about the conditions under which they are made. A sense of responsibility coupled with reputational damage has pushed many managements to take supply chain ethics seriously.

But the media attention on the exploitation of cheap labour in mainly poorer nations has to some extent obscured another procurement issue much closer to home: imbalances between the financial power of larger companies and those of smaller ones. The latter often have little clout in negotiations on, say, price and delivery conditions.

Most codes of business ethics have clauses that set out companies’ obligations to those with whom they do business both at home and overseas. These will include terms on the timing of paying invoices, gifts and hospitality, and confidentiality of information.

Transferring burdens

There have been recent examples of supermarkets trying to force changes to existing contracts upon food producers.

Sainsbury’s, for instance, attempted – and failed – to impose longer payment periods on its suppliers. In effect, this type of behaviour attempts to transfer the larger organisation’s cash flow problems to the weaker partner. From an ethical point of view, this would be classified as bullying and is generally considered unacceptable.

A recent study of this “David and Goliath” issue by Laura Spence of Brunel University draws attention to some of the ways that companies are redressing the inequalities in supplier relationships.

“Supplier Relationships in the UK” is based on interviews with suppliers to Toyota, Waitrose and Camelot, representing three sectors where problems have occurred: motor manufacture, food retail and services.

The research includes interviews with the procurers. Drawing on theses and other studies, she sets out basic guidance for both larger and small and medium sized firms.

Communities and partnerships

The experiences of suppliers to these companies show clearly that the size imbalance does not have to involve pressure and bullying if communication and engagement are seen as fundamental to the relationship.

In other words, partnership principles replace those based on a winner/loser mentality.

There is a convincing business case to be made for this more ethical approach. As long as both parties are open and see the mutual benefit to be had, there will be little cause to complain.

Most companies say they take this approach, but only recently have procurement officers been obliged to take ethical considerations into account in deciding who should be included on their approved list of suppliers.

The UK parliament’s recent decision on the Companies Bill, to require that larger companies list their main suppliers in their statutory reports, is further evidence that this topic is rising up the business ethics agenda.


Simon Webley is research director of the Institute of Business Ethics.
www.ibe.org.uk