Tale Of Two Buyers
Jim Prevor’s Perishable Pundit, November 17, 2006
One of the most difficult things to do is to align corporate culture and compensation programs with the goals of management. When we speak to VPs of Perishables or VPs of Produce at major retailers, all are very focused right now on food safety.
But we are also hearing from shippers about a “disconnect” between the goals that executives are setting for their organizations and the way the actual buyers are reacting.
Here is a fairly common scenario:
A team from a shipper flies into a retail headquarters to do an account review and discuss business concerns. The initial meeting includes high executives who emphasize that the chain wants exemplary food safety practices.
In the past, this chain’s supply might have been met via a hybrid mix of sources. The vendor grew some produce, represented some growers exclusively, bought some product in the field or on the trees that the vendor had packed to the retailer’s specifications, some of the product was bought from other shippers and, when things were tight the vendor might have bought some produce off the terminal markets to keep the retailer well supplied.
The vendor never had an actual contract, but over the years had come to be the primary supplier on his lines.
Well, this mechanism had served the chain well through the years. The stores were rarely if ever short of product and it was always priced competitively for the market.
But this model couldn’t sustain the kind of food safety scrutiny that the VP now is talking about in the meeting.
As we dealt with this before, via a letter we received from a reputable grower/shipper, to provide a certainty of food safety standards, you really need an asset-based solution. The vendor has to either grow it all itself or secure, in advance, certain growing deals that can be done under its control and according to the standards it specifies.
The vendor, being flexible, suggests to the VP that if the chain would contract for its requirements, the contract could specify any food safety standards the chain desires and the vendor would be happy to execute to those standards.
It is not a 100% perfect solution. After all, if a hurricane comes and wipes out a growing region where the contracted product was planted, the chain will still have to make a decision as to whether it is willing to accept product from another growing region that may not have been grown to the retailer’s specifications.
Still, barring natural disasters, if a chain needs ten trailers of product a week, the chain contracts for them and they can be certified to meet any standard the retailer wants.
Heads are nodded in agreement, hand shakes are given all around, the VPs leave the room to let the buyers work out the plan and then it happens… The buyer says something like this:
“This is a great plan, we are all on board with this. Just one thing: How are we going to be able to take advantage of markets when the price dips below the contracted price? You know, sometimes the market can get a lot lower than the contract price and our competitors would under price us and we can’t let that happen.”
Of course, a good vendor will try to come up with creative solutions in terms of how the contract can be structured that might make the buyer feel better. But, basically, the “magic is gone” — the vendor really wants to say “Look, you are getting a fixed price for exactly what you want. Some weeks it may be a bargain and you make extra; other weeks it may be expensive and you have to lose some back. Probably, overall, you will have higher costs than the free market, because you are asking for specially food safety certified product. So the product you will be getting is not comparable to product bought from the cheapest vendor every week.”
Although it is frustrating to hear these stories — and we are hearing them a lot from many vendors — it strikes us that to “blame” the buyers is futile. They are responding to the culture and compensation practices of the organization.
If the VPs are sincere about wanting the buyers to place food safety first, the VPs have the responsibility for changing the culture and the economic incentive systems.
Because, let us talk straight and imagine two buyers:
The buyer in the little story above buys into the contracting idea and, as a result, gets the food safety standards the chain wants but, even though the grower worked closely, the contracted price turned out to be higher this season than the market price so, all season long, the chain had to either price higher than its competitors, which reduced sales or had to accept substandard margins or a loss.
The buyer in the little story above resists contracting because he wants market-priced produce and as a result his product, though meeting all legal requirements, is produced with no extra food safety protocols. The chain is not always aware of exactly where it is grown and packed, but they deal with a good supplier and they did a field inspection once a year, although the actual crop used may not come from that field. The vendor signs lots of representations and warranties as to the way the product is grown and packed. Fortunately there were no outbreaks and buying at market price, the chain was consistently priced competitively to consumers and made decent margins.
Ok, now here is the test: Which buyer gets a bonus this year? Buyer #1 — who put food safety first, or Buyer #2 — who put profitability first?
If your answer is the same as the Pundits, you realize why solving this problem depends on a lot more than the intentions of retail VPs. Until the culture and compensation systems change, this is a problem that will stay with us.