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Premier Foods and 'pay and stay'

Professor Janet Godsell is Professor of Operations and Supply Chain Strategy at WMG. She gives her thoughts on Premier Foods asking its suppliers for payments to continue doing business with them.

"The old adage that it is ‘supply chains that compete and not companies’ has never been more true in the case of Premier Foods. The company is struggling to find a cost effective way to supply branded goods to the supermarkets, who themselves are in a fiercely competitive market.

Aldi and Lidl, choose not to compete in the conventional way. They do not offer branded products and sell comparable non-branded products at significantly lower prices. To maintain these low prices, they need a low cost of supply. This is achieved by keeping demand relatively stable by not promoting products, and passing that stable demand pattern right the way down the supply chain, to their supplier and their suppliers suppliers. In this way all partners across the supply chain can concentrate on improving their own internal process efficiencies to keep their own costs as low as possible. They compete as a supply chain.

To compete against non-branded products, the big branded products are frequently promoted. This might appear to offer good value to the shopper in the short term, but it causes chaos in the supply chain. It creates a variability demand that it passed all the way down the supply chain. It therefore makes it difficult for all involved to manufacture at lowest possible cost as they need to have costly buffers in place to deal with the variations in demand. Not only are the costs higher, but the profit margin is significantly reduced during promotions, as product is essentially ‘given away’.

In less ’stressed’ supply chains, it is more common for the customer, when they see an opportunity for growth to invest in their supply base to ensure the supply base can support their growth. Jaguar Land Rover (JLR) recognises that their supply base needs to be developed to support their growth plans, and is investing in their suppliers to ensure that this happens. For instance, they supported the expansion plans of local supplier ZF Lemforder to ensure future supply of axle sub-assemblies for the 4x4 range. This is a responsible and sustainable approach to supply chain development and one that the UK government has supported through their Advanced Manufacturing Supply Chain Initiative (AMSCI).

Premier Foods have taken a different approach. They have asked their suppliers to invest in them. This may be necessary due to the ’stressed’ financial position that they find themselves in, but it is not a common nor necessarily sustainable approach. They are hoping to sustain their business by investing in the products of the future and in this way create future business for themselves and their suppliers. Perhaps the real need is to start further up the supply chain with the supermarkets, and for them to recognise that they provide the lead. Just as JLR invests to protect and sustain its supply chain, perhaps the supermarket giants need to do the same?


Professor Janet Godsell is available for telephone interviews today.

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