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Sunday, 20 July 2014

Lots of Lovely Business From One Customer? Check Your Vulnerability and Have a PLAN B!

One of the classic facets of leadership is what to do about and how to combat vulnerability.  It is generally defined as having too large a proportion of sales to one outlet and it has been suggested that that proportion should not, as far as possible, exceed 15%.

If only.  The most tempting thing that can happen is being royally courted by an important customer with all the blandishments leading to more and more business.

I recall a client some years ago who manufactured and supplied consumer based product to the major outlet in the United Kingdom and when I knew him the proportion of sales to that customer was hovering around the 70% mark.

And what happened?  He made a good product, was innovative in design, gave great service and was reasonably priced.  All of these factors made his company an ideal and reliable supplier.

Accordingly the customer asked for more and more, opened new categories, flattered him and in the end built the proportion of sales to over 90%.

Is this unusual?  Not really because the high street outlets are so hungry for good product and good service that they are able to place such a level of business that often only occurs in dreams.

And it is very tempting, of course, to accept the orders and see the business growing.  The problem is that the growth is there all right but is it healthy growth?

What eventually happened was almost predictable.  I constantly warned he client but he kept saying that the buyer lover the product and the company and the business was safe.

The trouble is that buyers are transient souls and he left the customer to be replaced by a buy from one of the customer’s competitors.  He brought in with him all the manufacturers and suppliers whom he knew and could work with.

My client was not one of them and he was told that the business would slowly be moved away.  Slowly?  In three months the orders had dried up apart from a few where he had a unique place on the shelves.

The upshot was that he went out of business having made no provision for this eventuality. 

It is also possible that a business can be vulnerable to a supplier, for example.  One of my clients dealt with a specialist engineering business that manufactured a specific and unique component for him.

The supplier suddenly called him one day to say that cash had run out and they were in receivership.  The product was so important to my client and was impossible to source quickly from anywhere else, that there was only one solution.  He had to buy the manufacturer and so maintain supplies but at what cost?

The point is, of course, that you can be vulnerable to just about every part of the business and it needs to be considered as a regular part of management discussion.

Look at a few possibilities.  You have a particularly talented top technical manage in the business in an area of activity that is very unusual.  That is a person you really don’t want to lose.

Perhaps you are a “one trick pony”, brilliantly good at designing and manufacturing a product for which you are justly famous.  That is a classic situation of someone spotting what they consider to be an opportunity and they start to impinge on your markets.

However good you are, however well regarded you and your business are, the markets are unforgiving and will move as soon as they perceive a better deal.  How often have we heard the lament that the company has lost business because the customers have decided to source abroad at far lower prices?

There is not time for the wringing of hands and the angry resentment of what is happening.  The only way to combat vulnerability is to identify it before it happens and make sure that you always have a Plan B, just in case.

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