Closing the stable door

It is just over 6 months since the UK food industry was embroiled in the effects of the horsemeat scandal where horsemeat was passed off as beef. The so called “Horsegate Affair”.

At the time the Chartered Institute of Purchase and Supply reported that almost half of supply chain managers “do not have a means of monitoring their entire supply chain”.

Even more damaging was their comment that “how few chief executives and boards take supply chain issues seriously”.

Initially the effects of the horsemeat scandal were dramatic. In the first two months following the reports of horsemeat being found in ready meals sales of these products were down 5% year-on-year, frozen food sales dropped 13% and there was a fall of 3% in chilled ready meal value sales.

One of today’s buzzwords is “traceability” – it being incumbent on companies to monitor all aspects of their supplier’s performance with failure to do so having far reaching and damaging consequences.

In the eye of the storm it appeared that the days of a “cosy” relationship between Buyer and Supplier, the archetypal nod and a wink would have been consigned to history.

Now six months later nobody has faced any penalties or sanctions for what was described as the worst scandal in the history of the UK supermarkets.

In reality its business as usual and a further indicator of the power and influence that these groups exert in the UK.

 

There is nothing new, only different

 

It is rare in life either privately or in a commercial environment to come across an entirely unique or new situation.

The financial crisis which last faced the world markets and business has parallels with previous financial crises such as the 18th century South Sea Bubble, the Victorian Banking crisis of Overend & Gurney, the Great Depression which followed the 1929 Wall St Crash, and the Dot Com Crash.

In all of these episodes the common denominators were reckless pursuit of profit whilst fundamentals were ignored, the so called “get rich quick” school of business.

Following each of these debacles there was a collective reigning in and return to the principles of sound business.

However memories are short and it is not long before the blurring starts again and risky practices again become more and more the norm.

Complacency has resulted in the demise of numerous organisations.
As George Santayana commented “those who cannot remember the past are condemned to repeat it”.

 

Trust –the defining business requisite

 

As economic conditions remain tough more than ever the question of trust is of paramount importance.

 

Operating margins are being squeezed and people are looking for ways to protect their bottom lines. As we witnessed earlier this year with the furore over horse meat contamination in “Beef products” there will always be those who disregard regulations or flout the law in the belief that they will get away with it.

 

At the time a government minister stated "People should have absolute confidence in what they are buying. The responsibility for that lies with the retailers, who need to be absolutely sure that what they're selling is what they think it is."

 

It boils down to the integrity of the supplier, no matter how many factory audits are conducted or how many QA questionnaires are completed it is essentially an issue of trust and reliability.

 

The same can be said of the Buyer, if goods are delivered on a credit basis this should mean that the Supplier has every right to expect that the agreed settlement terms are adhered to.

A good relationship / reputation takes time and effort to build and sustain, once damaged it is hard sometimes impossible to restore.

In the words of Warren Buffet Warren Buffett - "It takes 20 years to build a reputation and five minutes to ruin it. If you think about that you'll do things differently."

 

KYC - know your customer

In the US this basically refers to a due diligence process undertaken by Banks and financial institutions to combat fraud, identity theft and general scams.

 

It is however a mantra that most organisations would do well to adopt.

 

Rapid advances in technology continue to transform the way we do business. Everyday business tools would have been regarded as flights of fancy not so long ago. With the unstoppable rise of e-commerce come challenges.

 

One of the biggest dangers is the lack of personal contact between a company and its customers. Obviously this is not an issue for online retailers selling product over the net and being paid via a Debit card or Pay Pal etc.

 

However the is an increasing trend for B2B ales to be concluded by email and even SMS. With the loss of the personal contact the identity and customer relationship suffers.

 

The surest way to avoid problems is by knowing your customer and understanding their business.

 

This relationship and mutual understanding cannot be achieved via a key pad and electronic ordering system.

 

Turnover vanity, profit sanity, cash-flow reality

 

More than ever, all businesses operating in today’s climate need to have constant and rigorous focus to their commercial exposure.

 

Against the current competitive background it is very difficult to contemplate turning away business especially from a customer of long standing. 

However as business conditions remain difficult we are witnessing a growing trend for companies to squeeze suppliers in various ways. This can take the form of a decision to arbitrarily extend payment terms, decide not to take up previously agreed deliveries or introduce respective price discounts. 

From a suppliers perspective this erosion of operating margin means that in some instances the best business decision was to leave it to your competitors. 

When stricter controls are in place over such elements as payment terms and credit limits the result is likely to be a reduction in turnover. 

The upside of such fiscal discipline carries its own rewards. Avoiding defaults by customers is the surest way to protect the company’s bottom line at a time when profits are hard won and losses easy to establish.

 

A gun to the head

As more and more companies struggle with their cash-flow issues, they are revisiting their payment terms with their suppliers.

The latest review from Marks and Spencer has resulted in them imposing extended payment terms from Freight-on-board (FOB) suppliers who have seen their payment terms extended from 60 days to 75 days, while full-service-vendors (FSV), who transport, store and deliver goods for M&S, will see their payment delayed from five weeks to seven weeks.

The changes, which will boost Marks & Spencer's cash flow, could anger suppliers. M&S's major suppliers were upset in October 2011 when the firm asked them to make a one-off contribution of 1.25% of their annual turnover with the retailer to its store revamp programme and associated advertising.

In reality the suppliers have little alternative – if you want to keep trading then you have to accept the “realpolitik”.

 

The key is to make the most of available cash resources which inevitably leads to some hard commercial decisions. Late payers are a luxury that no company can afford in this climate. Stock must be turned into cash as quickly and efficiently as possible.

 

Those who either will not or cannot adapt to the demands of today’s business will go the way of the dodo.

 

Wake up and smell the Coffee – whilst you can

 The rise of the developing world is really just a return to business as usual.

 

After all, until the 18th Century, India and China were the richest countries on the planet. For 18 of the past 20 centuries China had the largest economy in the world until the 19^thcentury and the industrial revolution.

Chinese companies are increasingly active and will continue to make international acquisitions. Bright Food China's second-largest food manufacturer are currently in talks with Israel's largest food producer Tnuva Food Industries Ltd over a potential acquisition, which is valued at $1.29 billion and expected to be the largest purchase of an Israeli firm made by a Chinese company. Bright Food spent about 7 billion yuan ($1.14 billion) in the year 2012 in purchasing 60 percent of the shares in Weetabix, a British breakfast cereal producer, after carrying out eight other overseas merger and acquisition projects since 2009.

Meanwhile in the US, Smithfield Foods Inc. , the world’s largest hog and pork producer, said U.S. regulators will allow the company to be bought by China’s Shuanghui International Holdings Ltd.for US$ 4.72 billion a deal which represents the biggest Chinese purchase of a U.S. firm.

The Committee on Foreign Investment in the U.S., or CFIUS, approved the transaction and it will be voted on by Smithfield shareholders at the company’s annual meeting Sept. 24.  

Meantime as evidenced by the recent purchases of Corn from the US, China will continue to be a major buyer in the international agri markets in response to demand from its burgeoning middle classes. Chinese China's state stockpiler Sinograin recently bought more than 1 million tonnes of U.S. new-crop corn,in addition to sizeable volumes of Wheat and Sorghum.

 

With a population in excess of 1.3 billion (approximately 20% of the world’s population) imagine the implication for Western consumers should an early morning cup of coffee become the beverage of choice!

 

The Bank that likes to say "no"

Back in the 80’s the TSB (aka Lloyds) coined the advertising slogan “the Bank that likes to say yes”.

Fast forward to July 2012 and the launch of the government’s Funding for Lending scheme designed to help hard pressed SME’s obtaining funding. A year on and the figures reveal a somewhat depressing picture. Net lending to businesses has dropped by £2.3 billion since the launch of the scheme.

Ironically the banks who were bailed out by the tax payer namely Lloyds Banking Group and RBS are two of the worst culprits with their net lending dropping by £12 billion.

Where SME’s are able to obtain funding it comes at a hefty premium with nearly one in 10 companies servicing bank lines at more than 11 percent interest.

Whilst there is much talk about the recovery in the UK economy there is nothing to suggest a more accommodating response from the banks to small businesses in the near term.

Starved of funding businesses will find it hard to grow so it is imperative that every effort is made to maintain efficient cash-flow.

Managing in troubled times

 

Working with companies over the past months I have noticed that there is an increasing sense of demoralisation amongst many sectors of the work force.

The causes for this are readily identifiable, many people are struggling with their own domestic finances whilst at the same time the need for increased levels of performance and efficiencies at work have rarely been as intense.

It is the responsibility of the Management to ensure that during these times Staff members are encouraged to give of their best.

Too many managers are remote from the day to day activities of their staff and appear to have the attitude that the people who report to them are lucky to have a job.

This mentality is counterproductive. Staff need motivating and incentives do not necessarily have to come solely in the form of financial rewards.

Some of the best run and therefore by definition most successful commercial entities are those where the workforce is engaged and feels part and parcel of the organisation rather than merely there to make up the numbers.

 

4/5 ths of the iceberg is below the surface

In the wake of the financial crisis the Chairman of the US Fed Reserve commented that "even as we make progress on known vulnerabilities, we must be mindful that our financial system is constantly evolving and that unanticipated risks will develop over time,"  

In many companies the Directors simply do not have the understanding of the mechanics or the day to day activities of the business which they purport to run. 

For example I have worked in trading environments where totally unrealistic profit targets have been passed from Board level to trading departments. No cognisance having been given to the disproportionate risks which need to be taken to achieve these targets. 

Some of the most spectacular financial flame outs have followed a period of ostensibly highly successful trading.

In their desire to recognise these “profits” no thought were given as to how they were being made. In such times it would be well to take note of the old adage that is something looks to be too good it usually is! 

If your company is bucking the trend in these difficult times it may well be that you are implementing a winning formula.

However history tells us that it is often a prudent course of action to look under a few stones – just in case.

 

Low cost entry into the UK market

The UK offers a very attractive market for companies wishing to export their products. Counter party risk is identifiable and can be successfully managed.

 

However one barrier may be the perception of high operating costs.

 

There is no doubt that to commission and run a UK operation can prove a costly commitment. The lists of outgoings such as rent, communications, staffing costs are daunting, particularly in a start up situation where income streams are lagging far behind these costs. 

This is where we can assist you, as an established independent company, we have experience of representing overseas organisations in marketing products and services for the UK market. 

In addition to opening up new markets for your products and services we can also police the all important areas of logistics and payment of your invoices. 

An introduction to our activities can be seen on our web site www.glbconsulting.co.uk or alternatively why not contact me at gordon.blackburn1@btinternet.com to arrange a meeting to discuss how we assist you in entering the UK market.

 

Everyone needs to feel recognition

Against the current economic background everyone expects ultimate value for their cash be it the corporate customer or the man in the street.

 

It is a paradox that as times become tougher and business harder to win the level of service offered by many Suppliers is falling very short of acceptable standards.

 

From the frustrations of automated answering (devised surely to test anyone’s patience to the ultimate degree) to the failure to meet agreed delivery schedules Customers are left feeling that their business is not valued.

 

Little wonder that customers opt to vote with their feet. Customer service is not a difficult act to pull off – in reality all that is required is to give the Customer the feeling that their business is important and they are valued not just “one of a number” or even worse a nuisance.

 

Those businesses that master the art of Customer service will emerge from this current difficult period all the stronger.

 

In these difficult times the “hard nose” approach has merit

As funding issues continue to bite more and more Customers are actively employing various tactics to delay payment to Suppliers. Credit control and the monitoring of payments is an increasingly critical element of every business.

 

When a Customer exceeds the agreed payment terms, they are in reality using the Supplier as an alternate (unsecured overdraft).

 

This situation if left unchecked can spiral out of control. In a worst case scenario the Supplier is in reality forced to keep “trading” with the errant Customer for fear of realising a bad debt.

 

Think of the parallel to the ongoing Greek situation – it is a slippery path.

 

Slack policing of accounts receivable will have serious consequences. At best tardy payments damage cash-flow and at worst can often be the precursor of a company failing with the end result of a total write off.

 

Take a long hard look at your accounts receivable – are you happy to see 30 days drift into 60 and beyond?

 

Consider the damage that is being done to your company’s financial position.

 

Ask yourself “who is taking advantage of us?”

 

Avoiding ostrich management

The result of management and shareholders ignoring obvious problems usually ends up with the plaintive cry “why did that go wrong?”

 

The reality is simple, a large number of companies fail to address problem issues early enough to avoid an oncoming crisis.

 

The signs of a troubled business are usually apparent – these include lack of controls, lack of strategic vision, a demotivated workforce and obsolete or valueless stocks etc.

However for a variety of reasons these problem areas are not tackled.

Instead of grasping these nettles, often the preferred option is to engage in a totally pointless course of action such as a rebranding exercise or the launch of another product range destined to fail for the above reasons.

 

Problems ignored rarely go away. Timely intervention can avoid the need to conduct a messy post mortem

 

Customer service - getting the balance right

 

 

The old adage the Customer is always right has come in for a fair amount of criticism recently and there are many times when plainly the Customer is in the wrong.

Notwithstanding it is of paramount importance to the sustained growth of any business that the Customer is kept onside.

One sector that has drawn much negative comment recently is Banking

The key requirement that any Customer wants is to feel that his/her business is valued and appreciated.

In business securing the deal is only the start of the process and the repeat order very often stands or falls with the after sales service (or lack thereof).

Simple but effective measures such as ensuring all contracts are performed efficiently and within due time and that any complaints are handled promptly and with courtesy will go a long way to building and maintaining long lasting relationships.

We have all encountered the difficult Customer with whom it would be easier not to deal. However, in these difficult times there are many who would willingly take this “problem” and revenue off of your hands.

 

Tapping the barometer

Some of the the best indicators are the least sophisticated. The UK economy may be showing signs of recovery but is far from robust – the clearest evidence of this can be seen as you walk down any High Street.

 

The rising number and popularity of charity shops tell underscore that many families are struggling whilst at the same time the spectre of administration looms large.

 

With many people continuing to struggle with debt and job insecurity it is hard to imagine a return to the heady days of consumer excess.

 

As the knock on effect percolate back down the chain many businesses will suffer.

 

External factors by definition are difficult to handle but at the same time in-house disciplines can at least provide some insulation.

 

Cash-flow will continue to be a critical issue over the coming months so as always strict governance of debtor and inventory control will provide some measure of comfort.

 

 

Today’s mantra – focus on cutting costs

 

With operating margins being continually squeezed it is imperative that costs are rigorously controlled.

 

Every sector is seeing the impact. Many companies have opted out of using air freight switching their business from air to slower and less expensive routes.

 

Manufacturers of electronics and mobile phones are now shipping cargo by sea because competition was eating into their profit margins meaning they needed to cut delivery costs.

 

Traffic will continue to moving onto the water because moving goods by air is very energy-intensive and the high cost of jet fuel was making air freight too pricey.

 

Facing marked resistance from consumers to price increases and a greater level of competition, those companies who are unable to control costs face an uncertain future.

 

 

There are times to hold and times to fold

 

In business as in poker there are times when discretion is the better part of valour. Put simply, some of the best business deals are those you turn away.

All organisations operating in today’s climate need to have constant and rigorous focus on their commercial exposure.

Against the current competitive background it is obviously difficult to contemplate turning away business especially from a customer of long standing.

However an objective assessment may well lead to the conclusion that in this instance the business would be left to others.

Reduced turnover will result when stricter controls are in place over such elements as payment terms and credit limits.

However, the reward or such fiscal discipline is obvious. Avoiding defaults by customers not only protects the company’s bottom line but allows focus to be placed on more profitable activities.

 

 

Time to tighten up

 

The summer holiday season is now behind us and as businesses start gearing up again, a general sense of reality will start to take its place.

The signs are that the last quarter of 2013 will be a challenging time for business as consumer’s further reign in their spending.

Without doubt now is the time to tackle potential problem areas with some effective housekeeping.

How much inventory are you carrying?

Rather than face a “fire sale” it may well be prudent to lighten up now with some innovative marketing strategies.

How is your cash position?

With the backdrop surrounding financial institutions and Governments alike, don’t expect the Banks to readily provide additional finance- it is an absolute priority to maintain positive cash-flow and this can only be achieved by keeping debtors under control.

Undoubtedly, the casualty rate will climb as we head towards the end of 2013 so make sure your business doesn’t become part of these statistics.