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The Consequences Of Squeezing The Supply Chain.

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Squeezing suppliers on costs is pretty much standard practice among retailers who are trying to keep themselves in the black in what is a fast-moving and highly competitive marketplace. But, as this week’s events prove, it can be fatal for their suppliers.

 

On Monday, British high-street retailer BHS slipped into administration, followed in no less than 24 hours by tailors Austin Reed.

 

The demise of BHS marks one of the biggest retail failure since Woolworths in 2008 and puts 11,000 jobs at risk. Yet, the fallout for the supply chain is far greater and more devastating than that.

 

BHS has an estimated 1,200 creditors – small UK businesses that supply goods and services to the company – who are now also in a precarious financial position. And the more trusting and faithful these suppliers were to the 88-year old retail chain, the hardest they are likely to be hit.

 

As far back as 2006, BHS wrote to its suppliers requesting discounts on goods and telling them that payment terms would be doubled to 60 days. BHS is not alone in taking action such as this. Numerous retailers have been asking for retrospective discounts on supplier orders, to try and safeguard themselves against the tough trading environment that is the retail industry.

 

To a small or medium-sized enterprise, saying no to these terms is pretty much a non-starter – not only would it be a significant loss of revenue, but, as retailers continue to disappear from the UK high street, opportunities to gather new contracts are largely limited.

 

Warning signs arose in April last year when trade credit insurance cover for BHS was reduced or quashed completely. Credit insurance firms were sceptical – and rightly so, as this week’s headlines show us, – when Philip Green sold off the struggling retailer to Retail Acquisitions for a grand sum of £1 in March 2015, and they refused to grant cover for suppliers connected to the firm. This insurance protects suppliers if the retailer falls into financial difficulties and cannot honour its contracts, and so, without cover, they have no way of recovering payments if the retailer goes under. 

 

Many suppliers decided to stick with BHS, continuing to supply them with goods, but leaving them vulnerable should the worst happen. Fast-forward to this week and the very financial problems most feared came true.

 

BHS’ 1,200 suppliers now face being left unpaid to a sum of about £52m, and, with no trade insurance cover, there is no guarantee when, or if, they will ever get this money back. It has been estimated that unsecured suppliers could receive just 1.23p in the pound through administration.

 

To a major supplier with numerous big contracts, these losses may well be no more than a drop in the ocean and they may be able to brush this off as a blip. But, for a local biscuit maker or family lighting business, it could mark the beginning of the end. To make matters worse, small suppliers are typically the last in the pecking order to get paid through administration when a contractor goes bust.

 

Squeezing suppliers and passing risk down the supply chain may look and sound like the perfect financial fix but it has proved that it isn’t successful. While not a new concept, surely working collaboratively with suppliers is the only real way to reap more benefits when times are good and even more when they are bad. BHS didn’t and it is paying the ultimate price.

 

This article is a piece of independent writing by a member of Procurement Leaders’ content team.

 

Rachel Sharp
Posted by Rachel Sharp