Pavlina Tsvetanova’s article, published in Your Business Magazine

https://www.tbmagazine.net/statia/dostavchici-hishchnici-ili-kak-da-ne-izyadat-firmata-ni.html

Suppliers are the partners with whom we build our common future. We rely on them about our current portfolio and for the development of new products. We rely on them also when we meet difficulties on the path or when we want to overleap the competition. We work so closely and for so long time that we even become friends. But does the friendship exist in business? And should we accept the friendship in business completely?

Alike all my articles, this one is also based on real stories, unpleasant stories in which developed businesses change their owners. But the initial owner had no plans to sell, just his supplier has fished the company out.

Why is it dangerous to trust the supplier completely? Because there is a risk once we develop the market, this supplier to overcome our company at zero price. The capture is slow, continuous, methodical.

When we start a business, we put all our energy in it, we invest money, time, nerves, knowledge and we grow this business. Due to lack of resources in the beginning we trust our suppliers and rely on their propriety. During the working process 1-2 suppliers show potential and we work mainly with them. They deliver at acceptable prices, in small quantities, wait us for the payment, they are always available on the phone, in other words, these are our angel-suppliers. As it is said, let all of us work with such suppliers. And here is the catch. This ideal situation has an end, sometimes the end is unpleasant. The owner of the company sees in the supplier an associate with whom to build friendship and forgets to control. The mistake is dictated by pure feelings and expectations that all people are trustworthy. This naivety leads to two problems: supplier-parasite or supplier-predator. The supplier-parasite extracts the company energy because slows down the processes by late deliveries or poor quality products. But in the name of good relations, this supplier still works for us. So we exhaust our staff who wants to improve the situation but are not allowed. The supplier-predator marks its victim shortly after their appearance on the market, waits them to grow a little and then scrunches them…

Here are some examples of classic conquering or exhausting a company:

1. A company has a single supplier for the main materials and his share exceeds 30% from the turnover of all our suppliers. If we have given over 30% of our activity to a supplier, we are in the danger zone. It doesn’t matter if we have a contract or not with a supplier, if his turnover exceeds 30%, the red light is on.
2. When a supplier exceeds the healthy threshold, he’s in a position to dive us rather quickly. We literally give him our company with developed markets, for free. We have let him so close either because it was comfortable, or to save some work, or to focus on something more urgent and so on. The supplier that have more than 30% share is a threat for our firm. Such supplier can block us at any time by:

• Stopping the deliveries at any time. So our production stops, the customer orders are not fulfilled, we pay penalties. The damages are big at least until we cover the production.
• Change ultimately the payment terms and force us to pay immediately. Often there are no contracts with the suppliers and delayed payment is just a verbal agreement. When the credit amount grows, the supplier may ask the payment immediately and to create difficulties for us or even bankruptcy, especially if we have signed a payment guarantee letter.
• The suppliers withdraw some inventory which was provided “free of charge” as a condition to buy their products. An example of this is renting a storage or a production place together with the equipment (even old equipment). The supplier decides that he would need the place and the equipment after 2-3 days and we must leave it. But what shall we leave? We could take the personnel only if the supplier hasn’t engaged it already.

1. There are many cases when companies outsource their entire business and think that they control the processes. Nothing of the kind. When we have focused our business in 1-2 subcontractors only, they control us, not vice versa. In period of crises, when we and the subcontractor should unite and work for the common wealth, he affords robbing the cream, to squeeze us and to risk both firms to bankrupt. Our bankruptcy often is sure, while in the meantime the supplier has marked another donator.
2. A company buys packaging materials from a local supplier. The packagings are standard on the market and could be produced by many suppliers. But the owners of the above mentioned firms have agreed that all packaging materials will be purchased from exactly that supplier. But the supplier fails to deliver (due to poor equipment, poor organization, poor management, etc.), which leads to quality problems or delays of all deliveries. The owner of the company-buyer does nothing to solve the problem, expecting that it would be solved by itself. In the same time the Buyer is treated as incapable to handle the situation. Some months later, the Buyer is fired, the supplier continues to deliver whenever and whatever he wants to deliver and the new Buyer is forced to waste nerves and efforts. The sales representatives’ turnover in the company-buyer is huge because due to the poor packaging, the goods arrive at the stores in very poor condition.
3. Another company has been purchasing transport services from one and the same forwarder for 10 years. Nobody checks the market prices because the owners are “friends”. One random price check showed that the market has significantly changed but the supplier has forgotten to adjust the prices, which were 20% higher than the market.

To conquer a company, the only thing one supplier needs is to become irreplaceable by concreting with the assignor (via the owner, or the buyer, or the technologist). Sticking to the owner has several variations, like big scale services for business development (production line, loan, place) sticking to the technologist or the buyer usually happens via small personal services like booking a hotel in pick season, help in issuing healthy problems, help in arranging a bank loan and so on. The aim is to build loyalty so that another supplier is not allowed to deliver. Another trick is the buyer to offer lower and lower prices until all his competitors are eliminated. The lower prices are achievable by lower quality or just dumping. And so, once got the monopoly position, being irreplaceable, the supplier attacks and fishes our company out.

The well-wisher suppliers are two blades knives. On one hand they help us to grow faster, on other hand there is risk to conquer us, as there is no free lunch.

We do not talk about economic spying or theft – here the question is how a company is given out due to negligence.

Tracking the events, I recognized several typical mistakes:

• Owner’s naivety – it appears when there is lack of resources to control the process and blind trust in employees or suppliers.
• Lack of control in supply chain. If there are no criteria and serious control, every supplier may become irresistible and to conquer our company. The criteria for evaluation of offers and suppliers should not be formal, but objective and practical and to serve the firm. The mechanisms for control should be straight-out and traceable.
• Lack of control in finance. Crossing streams and lack of adequate control in supply chain is a prerequisite the accounting to be unable to trace prices and deliveries. This is where the money flows out. The accountant may pay undelivered goods or services or may pay at higher prices.
• Resistance to change – this happens when we do not want to see the other options on the market and buy from 1-2 suppliers only. I’ll never forget when one operations manager declared that their business is so specific that only one subcontractor can do the job. After checking the market, we found 13 potential subcontractors.

How to prevent a possible conquer of our company:

1. The first step is to do АВС analysis per turnover and per items.
2. If there are suppliers with more that 30% share, we need a quick plan for finding alternative materials and suppliers.
3. Testing alternative materials and replacement of the existing ones to achieve balance.
4. Monthly check of ABC analysis until reaching the balance among suppliers. Then the check is once per quarter.

Changing materials and suppliers is hard and time consuming process, so take your time of at least 2-3 months to transfer from one supplier to another.

Every person makes mistakes. But unfortunately some mistakes cost too much and the precaution is not redundant. It is good to have friends, but friendship with suppliers should be applied with measure.