Trading with a buyer who is much bigger than you can be great, it can also expose you to the risks of buyer power.
The following quote from former Debenhams Chief Financial Officer Simon Herrick is taken from a letter sent to Debenhams suppliers and reported by Sky News;
“As we will mutually benefit from the growth of Debenhams we are now seeking a contribution from our suppliers to support our commitment to on-going investment.”
He said this would include: “A single-sum contribution on all outstanding payments on your account at close December 17….An additional discount of 2.5% applied to all open orders on our system at close on December 17”
“This is a contribution and not a permanent amendment to your trading terms with Debenhams,”
The Buyer Power Risk
So let’s put this in perspective. You have sold product to Debenhams at an agreed price, you cannot influence payment terms and now it is either accept less or no more business.
What do you do?
This type of scenario is not uncommon. It is sometimes referred to as ‘concentration risk’, although this is more commonly applied to a situation where there is a reliance on any one person, supplier, or customer.
‘Buyer Power’ is where the buyer of your goods/ service has a level of influence far greater than the other. This type of power risk can apply from a supplier perspective also. For this read Game Stores who saw the likes of EA, Nintendo and Sony all reduce levels of stock supplied for various reasons. Could Game influence these decisions, no (see BBC article for full info).
How To Address Buyer Power
The easiest business model to evaluate this is Porter. Porter derived five main forces impacting a business. The two to look at in the Debenhams scenario are ‘Buyer Power’ and ‘Supplier Power’.
Sometimes you cannot balance out these risks, they are simply an accepted part of doing business. However few people have ever been run over by a bus they saw coming, poor analogy maybe, but you get the idea. Call it ‘fail to prepare, prepare to fail…’ you get the gist.
We are not criticising Debenhams here, merely highlighting how buyer power can impact if you are not prepared. See the Sky article for full info.