What is surprising is the speed at which Tesco is trying to implement these measures. We believe this is more evidence that the UK could be in for one of the worst retail Christmases in several years and major retailers are taking steps now to ensure they have counter-balanced the value of unsold stock they expect to have in early January.
Unfortunately, for many small under-capitalised businesses this will create a problem since the normal range of banking facilities (overdrafts, re-mortgage of property, commercial loans) has almost dried up. So while major retailers try and shore up their balance sheets ahead of the Christmas season, it is essential that they do this ethically and sensibly. Causing businesses to fold will create short-term supply issues that will probably force up consumer prices at a time when the marketplace is ultra-competitive. Common sense and business ethics should go hand-in-hand in these hard times.
It is pretty standard practice for larger companies to strong-arm suppliers, particularly when times are tough. But Tesco's decision is bad business plain and simple. At best, it will damage its relationship with these smaller suppliers. Some may even walk away. At worst, Tesco's actions could even put some out of its suppliers out of business.
Rather than resort to these types of desperate measures, the most forward-thinking large companies will do almost exactly the opposite of what Tesco and others have done. They'll work more closely with their suppliers and collaborate with them, creating a situation where both companies share key data on manufacturing capabilities, inventory, and demand forecasts. It is possible to create a win-win situation here, with buyers more easily able to find the products they need, when they need them, at the best possible prices - and suppliers able to count on their best customers and still make a reasonable profit.
Brian Shanahan is a senior director at REL, a consulting company that provides sustainable cashflow improvement across business operations.