From Strain to Strength: Supplier-Buyer relations improving

The pandemic caused disruption to supply chains & strained relationships between buyers and suppliers. As the situation eases, new patterns are emerging

A recent Wall Street Journal (WSJ) article looked into shifting Supplier-Buyer relations as a consequence of easing pandemic strains.

As we all know, the commercial relationships between retailers and suppliers underwent significant changes due to the Covid-19 pandemic and the further stresses of the war in Ukraine. As companies grapple with ongoing changes in consumer spending and high costs across their supply chains, these relationships continue to evolve, accordingly.

What won't fail to be noticed, is that these relationships are in this model, strictly determined by market forces.

As an attempt to resist the negative consequences of free-market volatilities, many corporates have taken to attempting to dictate the outcomes.

Large companies like Walmart Inc. and Whole Foods Market are demanding that their suppliers reduce prices for goods. Meanwhile, other retailers are canceling orders for products ranging from clothing to appliances. This is a marked departure from just a year ago, when companies rushed to restock their depleted shelves with merchandise.

Retailers look to leverage supply chains

Logistics experts believe that retailers are looking to leverage their scale and buying power to exert greater control over their supply chains now that the shortages have generally eased and supplier-buyer dynamics have returned to pre-pandemic norms.

Rob Handfield, a supply-chain management professor at North Carolina State University, notes, “We’re starting to see the power shift a little bit back to buyers again. They’re starting to become a little more competitive with their suppliers and putting more pressure on them.”

Increased demand, increased supply

In 2020 and 2021, retailers pressured their suppliers to ramp up production as consumers clamored for items that were in short supply, from toilet paper to home fitness equipment, and supply-chain disruptions slowed shipments. Retailers placed big orders early last year and rushed goods around transportation bottlenecks to ensure they had enough merchandise on hand for the fall, when consumer spending typically increases heading into the winter holidays.

However, this led to retailers having excess inventories and too many of the wrong items in the wrong places as Americans shifted their spending to services rather than goods. Now, many retailers are cautious about ordering to avoid overstocking, which has left suppliers scrambling to adjust to decreased demand and requests for lower pricing as they deal with the impact of inflation on their own operations.

As Ravi Anupindi, a supply-chain professor at the University of Michigan, explains, “The bargaining power is shifting. The over-inventory situation that started last year is really hurting the retailers, so they’re basically beginning to cancel orders.”

Some retailers are asking vendors to cut costs this year as they try to bring down prices for customers amid high inflation that has started to slow spending. These companies are pointing to falling transportation rates and declining commodities costs as they seek breaks on pricing.

Resisting price increases

For instance, grocery giant Whole Foods, which is owned by Amazon.com Inc., recently asked its suppliers to help bring down retail prices. Walmart also told its suppliers last year that it would push back against efforts to raise prices as the country’s largest retailer returns to a position of flexing its muscle in its vendor relationships.

Target Corp. has announced that it is paring inventory levels from last year’s peak, while targeting US$2bn to US$3bn in cost savings in the next few years.

The shifts are sometimes creating tensions in supply chains as suppliers try to recover high raw-material costs while retailers attempt to restrain higher prices at the checkout line that could dampen consumer demand.

Buyer-Supplier relationships finally start to ease

An Amazon supplier sued the e-commerce giant in December, stating that Amazon had reneged on promises made early in the pandemic to support the vendor with millions of dollars in new purchases. Vietnamese warehouse equipment manufacturer Gilimex Inc. claimed that it had dramatically expanded its operations to accommodate Amazon’s growing operations before Amazon halted its rapid logistics expansion last year. At the time, Amazon declined to comment on the case.

Suppliers are vulnerable when companies pause new orders since they are sometimes left holding raw materials or finished goods that no longer have a buyer, as Phillip Coles, a supply-chain professor at Lehigh University in Pennsylvania, notes: “You think about a supplier that went out of their way to make sure that you had everything, and it turns out you ordered way too much and now you go, ‘Oh sorry, I don’t need it now.’ What does the supplier do with that excess inventory?” This can cause financial strain and potentially force the supplier out of business. It's a domino effect that ultimately leads to further disruptions throughout the supply chain.

Moreover, in the wake of the COVID-19 pandemic, supply chain disruptions have become even more severe. Many companies have been forced to shut down their operations due to government-mandated lockdowns or safety concerns. This has led to a shortage of goods, especially medical supplies, and has highlighted the vulnerability of global supply chains.

Supply Chain diversification

To mitigate the risk of disruptions, companies are starting to look at ways to diversify their supply chains. Instead of relying on a single supplier, they are looking for alternatives that can provide similar products or services. This reduces the risk of disruptions if one supplier is unable to fulfill orders.

Another strategy is to invest in technology that can provide real-time visibility into the supply chain. This allows companies to identify potential disruptions before they occur and take proactive steps to mitigate the impact.

Disruptions in the supply chain can have a significant impact on businesses. It's important for companies to have contingency plans in place and to work closely with their suppliers to minimize the risk of disruptions. By doing so, they can ensure that they are able to meet the needs of their customers and maintain their competitive edge in the market.

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