Three separate events last week reminded me that every spend category has its “dirty little secrets”. Suppliers can exploit these “dirty little secrets” to squeeze a little more from buyers than buyers bargained for. Not all of these secrets are nefarious, but all reflect the inherently deeper category knowledge suppliers have and the limited resources buyers have to “sweat the details” in every category. Economists, like David Evans, call this advantage to suppliers “asymmetric information”.
Supplier “Dirty Little Secrets” from Last Week
The first example last week of a new supplier policy came via e-mail from a rental car company. The note below informed me of their new re-fueling policy:
Travel industry suppliers have mastered the art of the “buried in the fine print” add-on charge: resort fees, “opt-out” fees for the paper delivered to your door each morning, “9/11” fees that never went away, you get the idea. And don’t get me started on the airlines–which may be colluding!
Last week, The New York Times had another great example from the private equity industry. Private equity funds supply investment services to pension plans, endowments, and other investors:
My favorite report from last week was the revelation that Whole Foods, whom we know already as “Whole Paycheck”, has been apparently “short weighting” us on some of our purchases. In other words, Whole Foods was “putting their finger on the scale” and charging us for a higher weight than we were receiving of our organic goodies. As Bloomberg points out, this is a “tale as old as time”. (Beauty and the Beast reference intended). (By the way, the list of retailers who have paid penalties when the shelf price did not match the checkout price is too long to detail here.)
More Dirty Little Supplier Secrets
I’m not sure of any spend category where I have not seen some hard-to-detect supplier technique for squeezing out a few more margin points:
- I spent 15 years in the food industry where I saw:
- fat replacing lean meat (the Jack Sprat trick)
- water used to sanitize, but also to weigh down the product (e.g., chicken)
- ice caked on frozen shrimp to increase the weight (a leading retailer was fined for this one)
- grains wetted down to reduce dusting in transport (and increase weight)
- packages set to be filled just slightly underweight
- honey adulterated with corn syrup
- mislabeled fish
- olive oil adulterated with vegetable oil–you name it.
- In categories with huge catalogs, it has been best practice for a buyer and supplier to benchmark a market basket on the top items and wave hands a bit on everything else (where the supplier gets back some margin). Items in the market basket are suddenly discontinued and replaced by almost identical items whose price was not negotiated in the market basket. Many wholesalers/distributors also insist on removing manufacturer part numbers from invoices to make the buyer’s price comparisons harder.
- In leased equipment, financiers are hoping buyers will lose track of the lease and the equipment and keep paying on that forklift forever. (It’s called an “ever-green” clause for good reasons. It produces an ever-green flow of money to the lessor!)
- In CPG/Retail, freight, telecom, and other industries with complex invoices there are whole companies that make their money sharing funds that are recovered from erroneous billing and overcharges.
If you know the tricks in another category, please add it in the comments. It will be a public service.
Let me be clear, I’m not saying that all suppliers are evil cheaters. Some of these “add-ons” are just simple forms of price discrimination in the economic sense. (Hertz’s fuel charge allows them to get $13.99 more (less the cost of gas) from renters who do not have time to fill up or those who cannot remember the receipt if they did fill up!)
In addition, many of these policies are put in place, suppliers would say, to recover from the abuses buyers heap on them:
- habitually late payments
- virtual card fees piled on an invoice and late payment process
- post-contract concessions extracted by the buyer
- lower-than-promised volumes
- new delivery or quality requirements
The list of buyer abuses goes on an on too, unfortunately. (Can’t we all just get along?)
The result is a that the little war between buyers and suppliers escalates and simple transactions, over time, become a bit like the tax code–complicated and bloated with little loopholes. Buyers impose new requirements and suppliers, with superior knowledge, figure out ways to retaliate and game the system.
Trust, but Verify
Smart buyers know that smart suppliers will find a million ways to retaliate for abuse heaped on them. A few buyers try just become good, low-cost to serve customers and hope suppliers will recognize this behavior and reward it. Some suppliers are becoming more transparent on their prices and performance (not many). But as more transaction data becomes electronic and the use of big data accelerates, buyers are installing automated systems to help them ferret out these little tricks and other forms of fraud. DoubleVerify is an example in online advertising which is rampant with fraud.
I have worked with pricing, contract management, and e-invoicing vendors whose value proposition is, in part, verifying that these shenanigans are kept to a minimum. These companies operate in areas as diverse as:
- federal procurement
- leased equipment
- meeting and events
- healthcare supplies
- facilities management
Automated systems, big data, a little machine learning, etc. are bringing more transparency to buyer-supplier relationships in B2B– whether the suppliers like it or not. Caveat venditor.
Suppliers now need to think about how to band together to anonymously shame buyers who heap abuse on them!