Get ready for open book accounting
Open book accounting, and the close partnering of which it is part, are set to become widespread in relationships between buyers and suppliers, say the management experts. But the decision to be open with powerful customers is a difficult one to make in the traditionally adversarial food sector. Chris Lyddon found out more.
This issue was highlighted by a recent Sunday Times report on supplier relationships at Wal-Mart's UK ASDA supermarket chain. But open book accounting is not new. ASDA has been using the system with some suppliers for around three years. Mike Snell, ASDA's General Manager of Fresh Produce told just-food.com: "A supplier approached us, a specialist in top fruit and citrus, and said "Give us all your citrus business." He showed us the efficiencies he could make in his business in things like packhouse operation and the use of pallets. I'd never seen anything like that," he said.
There were initial concerns. "The biggest risk for us was the continuity of supply of goods at the right quality," Mike Snell said. Asda wanted to be sure that the arrangement would last.
"We arrived at the 'true cost of supply'," he said. "We both identified savings, including economies of scale for him, and costs which we were driving down the chain. From then on the relationship became stronger and stronger.
"In the citrus market share we've moved streets ahead. Then we were approached by an apple supplier, followed by others. Now we have seven suppliers operating the scheme. We do have others who would like to join. We're not trying to force anyone to do anything. It does give them stability," Snell said.
New way of thinking required
For the food industry this means an uncomfortable shift towards trusting each other in a market that is traditionally often adversarial. "It requires a different mindset," Snell said.
That first fruit supplier was Thames Fruit Limited. Founder Emilio Teresa told just-food.com he had wanted to find a way of cutting the costs in the supply chain. "I put a proposal to Archie Norman [then chairman of ASDA]. He thought it was a good idea," Teresa said. "The result was everybody working for the same object; a better deal for the consumer. But it also meant a better deal for the grower, by cutting out the people in the middle."
Going into partnership with ASDA meant cutting a customer base of nine supermarkets down to one. "A lot of people told me I was taking a big risk. I trusted the management of ASDA and they trusted me," Teresa said. "From my personal point of view it was a difficult decision, but it has been the best decision I've ever made."
The idea was home-grown and had pre-dated the Wal-Mart takeover, said Mike Snell. "Wal-Mart is interested in what we're doing. But the fact is that while it fits in with their ethics, their country is so big and they're expanding so fast that they couldn't do it at the moment," he said.
Professor Colin Coulson-Thomas of Luton University's Centre for Competitiveness has identified an unwillingness to build closer relationships with customers as one of the main features of companies that lose out in the battle for business.
"It's all about building a relationship. Open book accounting is all part of a relationship," he told just-food.com. "I'd rather tie somebody in and have the repeat business."
At the Food and Drink Federation, Kate Snowden put the concerns of some in the industry into words. "Obviously you want to have a good relationship between customer and suppliers," she told just-food.com. "Our concern is that in such a competitive industry where margins are so slim, I'm sure some people would be wary of revealing profit margins."
Fear of handing power to retailers
The fear was that the purchasing power would all be back with the retailer. And the question suppliers would ask was: "If we're having to reveal information to customers what does that give us? Do you get a guaranteed relationship for five years?" There were concerns that frequent changes in raw material supply would mean complicated paperwork as suppliers struggled to demonstrate their cost structure. ASDA's Mike Snell identified a need to keep reporting systems simple, in order to avoid spending any gains on extra accounting.
But Professor Coulson-Thomas, who stresses that open book accounting is only one part of a close relationship between organisations, said that the win had to be on both sides. "People often feel threatened because they see it [open book accounting] as something on its own," he said.
For the supplier there was an immediate saving. "Obviously it's very costly getting new customers. It's much more cost effective to hang on to the existing ones," he said.
"You're endeavouring to lock your customers into a long term relationship of which open-book accounting may be an element." It might also include online links, so that ordering could be done directly, or collaboration on product development. Any partnering deal would be likely to include details of how disputes are to be resolved. "You make explicit what both parties want out of it so that it's win-win, rather than zero sum," he said. The alternative to a close relationship was ad hoc ordering, - "give me a quote by three o'clock this afternoon and I'll buy the cheapest," he said.
Les Pyle, director general of Parnership Sourcing Limited, stressed the vital importance of trust. "Having an open book relationship is quite common," he told just-food.com. "One of the fundamentals of relationship building is trust. One of the ways to develop trust is to have a clear idea among the parties of the financial situation."
Partnership Sourcing Limited was established in 1990 by the Confederation of British Industry and the Department of Trade and Industry to promote the idea of partnering in business. "Our whole role is to help organisations to build relationships with other organisations," Pyle said. "Open book accounting is something a number of organisations practise as a way of having a continuing relationship with their partners."
There had to be a benefit for both parties. And they had to understand what level of margin both sides would see as reasonable. "The essence of partnering is for the parties to feel they're working together for mutual benefit."
Professor Coulson-Thomas said buyers throughout industry were expecting to see an increase in partnering. "Buying is costly if you always have to tender while watching other elements like quality as well as price. It's costly dealing with a large number of suppliers," he said. Most companies were trying to get the number of suppliers they deal with down to a smaller number with carefully nurtured long-term relationships.
Purchasers needed suppliers to be on-stream. "So you don't screw every last penny out of them," he said. He had experience of suppliers who'd opened their books to customers and found they were offered a price increase. "Their customers wanted them to make enough out of the deal for it to be important to them," he said.
No point hiding profits
On the other hand there was no point in trying to conceal an excessive margin. "If you're making an unreasonably high level of profit sooner or later that's going to come out. The problem is that someone else comes in with a more reasonable offer," said Professor Coulson-Thomas.
"Open book accounting doesn't have to mean lower profits. In a lot of cases part of the deal is to try to get costs down. You can save a lot of the wastage," he said.
He compares the relationship with boyfriend and girlfriend. "You don't compare bank statements if you just go out together once in a while. If you're going to move in together then there's a much greater sharing of information," he said.
There would be a hard message for some suppliers, said Professor Colin Coulson-Thomas. "If purchasers are looking to rationalise their supplier base, if you're not prepared to play that game then you're out. That's the hard thing," he said.
He was confident that open book accounting and the close partnering agreements between supplier and purchaser of which it is a part were here to stay. "It will be the coming thing," he said.
ASDA's Mike Snell was convinced of the advantages. "If you're prepared to be responsible about your supply chain and what you're buying, everyone wins. Most importantly the customer wins," he said.
By Chris Lyddon, just-food.com correspondent
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