Always Commit to more than one source of supply
The importance of developing good supplier relationships is something I deeply understand as both a Part time CFO who performs CFO Services and an Entrepreneurial CFO.
I’m not saying you should be disloyal to your suppliers. In fact a very profitable strategy can be developing loyalty to your suppliers. If the right supplier recognizes your loyalty it will result in better pricing, better terms, and in the long run, higher profits.
Rather, I’m saying you should take proactive measures to protect your business for the long term. It’s risky to have only one supplier for a particular business segment. If you do decide to use only one supplier, you may run into one or more of these problems:
- Drastic changes in price and terms. You may have general market forces working in your favor, but if you are not prepared to go anywhere else, you are at the mercy of the whims of one source, and you are stuck with their decision, which directly affects your company, no matter what.
- Changes in the quality of the product. If you have only one supply source and they don’t keep up with technology or they decide to reduce quality control to save money, your business can get hurt by a quality reduction you had no control over, and with no alternate supplier, the product of sub-par quality is now your only option.
- Suppliers taking advantage of you. Not all suppliers recognize loyalty in a positive way. If a supplier realizes they are your only source of product, they may feel they can give you any quality for any price that benefits them, because you rely so completely on them you have no choice if you want your product. Be wary of any supplier that tries to butter you up or refer to you as their “partner” because of how much you work together. If your “partner” supplier is giving you sub-par quality products, or forcing unreasonable terms or prices on you, you can be sure they don’t really see you as a “partner”, but as an easy mark.
- Not knowing how competitive the sole supplier is with respect to terms and pricing. There’s no way to know if you’re actually getting a good deal if you have no other supplier to compare yours to. And in order to really compare, you’d have to actually use another supplier, not just look around at other suppliers’ terms and prices. General market pricing cannot tell you all you need to know about how the supplier does business, or what deals are being made in the backroom of other suppliers (which would greatly affect how they really stack up against the supplier you use).
- You have no other credible source of supply if at any point your business takes a downturn and your one supplier decides to squeeze you with unreasonable terms, such as cash before delivery or requiring letters of credit. If you don’t have even one alternate supplier with whom you have established credit terms, your sole supplier can take advantage of you as soon as you get behind on your payables and start asking for ludicrous payment terms (which you’ll have no choice but to try and cope with because you’ve cut yourself off from all other options).
I know from personal experience in owning retail, manufacturing, and service companies over the last 28 years (over which time I’ve seen all of the above problems occur in situations without alternate suppliers), that establishing credit and business relationships with more than one supplier in all of your business segments is a very beneficial and worthwhile pursuit.