Don't Let Suppliers Control Your Business
Relying on a single supplier, or a major supplier, can be a recipe for disaster. For example, think about our country's dependence on foreign oil; if Middle East sources dry up so does our supply of oil, which could bring the country to a standstill.
The same thing can happen in your business. Say you're an interior designer and you make custom drapes for your clients. If you rely on a single fabric supplier and that supplier goes out of business, or decides to drastically raise prices, your business may come to a standstill.
Think about your normal operations. Do you rely on particular suppliers for key products or services? If so, can they be replaced quickly? Can you shift your business to another supplier without missing a beat?
Is Your Business Too Dependent on Specific Suppliers?
Many businesses depend on suppliers, but it is possible to be dependent to the point of risk. Think about the following situations and see if they apply to your business and to your current suppliers:
- Is the product or service absolutely vital to your operations? For example, if you build furniture, raw lumber is an essential product. If you sell computer systems, hardware and software are essential products. On the other hand, some office supplies, while necessary, are not particularly essential.You could probably do without rubber bands for a few weeks if your local office supply store goes out of business and you need to find another source.
- Is the product or service only provided by a small set of suppliers? Very few companies have a monopoly on a particular supply, but some companies do have a monopoly on products. For example, if you sell a specific software program, the manufacturer of that program has a monopoly on the product. Some supplies may only be provided by a few suppliers, and items like specialty equipment may only be manufactured by a single company. Determine if the items you need can only be purchased from one (or a few) sources. If that is the case, you could run into major problems if one of those sources dries up.
- Is the product or service based on a partnership or strategic agreement? If you run a restaurant you may have agreed to only supply soft drinks made by one beverage company. If they dissolve your agreement, you may face delays sourcing another set of products. Or you may have reached a partnership agreement with a local business. If that agreement falls through, the core of your business strategy may be in jeopardy.
- Do you only sell or distribute specific, brand-name products or services? If so, and the supplier decides not to supply products to you any more, you may be out of business.
The first step is to evaluate your situation and the risks you face. You may be willing to accept the risk of supplier dependence, but there are steps you can take to minimize or offset at least some of that risk.
Minimize Your Dependence
Even if you are dependent on particular suppliers who hold a near-monopoly on the products or services you need, there are still steps you can take to minimize your risk.
- Seek multiple sources even if you don't immediately use them. Most companies try to divide orders between at least two or three suppliers. Even if prices are slightly higher, maintaining an ongoing relationship with a couple secondary suppliers could make the transition period easier if your primary supplier can't or doesn't meet your needs. If you don't decide to do business with other suppliers, at least get a good sense of their terms, delivery schedules, and capacity. That way you can hit the ground running if you must find an alternative source of supply.
- Seek alternatives. If you rely on a particular product, supply or service, spend a little time researching other similar options. It's a lot easier to react in a crisis when you have a plan than it is to start from scratch.
- Set up long-term agreements. If you must rely on a dependent supplier relationship, take steps to safeguard the relationship. Set up a long-term agreement so it's tougher for the supplier to pull the plug. Keep in mind, agreements are no protection if the supplier goes out of business or simply struggles to meet your capacity needs.
- Consider bringing some functions in-house. While many firms outsource, what if you chose to increase rather than decrease the scope of your ancillary functions? If you rely on a provider for maintenance, for example, what if you chose to bring all or a portion of those functions in house? Increased cost might be offset by increased response time and greater control over your maintenance programs.
- Stay on good terms. If you do need to switch, make sure you maintain a good credit rating; otherwise you may be forced to pay cash if you switch to a new supplier.
- Check out business interruption insurance. Most policies are designed to cover your business in the case of catastrophe, major theft, or other disasters. Your policy could cover dependent supplier difficulties, helping you weather the financial storm if you lose access to the goods and services you need for a short period of time.
While you should make sure you build a solid relationship with major suppliers, keep in mind that you may be just as important to them as they are to you. Your suppliers may rely on your business to keep their company running. If that is the case, they will be much more likely to enter into longer-term agreements that can insure your company has the supplies, products, and service it needs.