Almost all businesses from time to time, somewhere on their growth curve, hit the dependency issue. Over dependent on a large customer, on a large supplier, on a market segment or on a government contract or on a technology platform.
In the UK many clothing related companies in the late 90s had become dependent on Marks & Spencer for survival, Daks Simpson, William Baird, Courtaulds Textiles. When Marks & Spencers axed these suppliers, the pain was high and in some instances terminal.
Anchor in Canada has sales of around $129m and is dependent on the automotive industry. Approximately 85% of its sales were tied to that sector and now its down to 70%. It has taken 5 years to drop 15%. It now supplies the wind turbine industry, medical, mining, and construction sectors. Evidence suggests that many didn’t make the switch to non-automotive sectors in time, perhaps up to 60 suppliers have gone bust in recent times.
Britain’s naval shipbuilders and designers are looking to diversify into other markets and target international opportunities in perhaps army and air force sectors around the globe. As the CEO of the JV between BAE Systems and VT Group said last June, we need to reduce our dependency on a single customer!
Equally dangerous is the reliance on one key supply chain. In regulated industries, approvals of new suppliers can take months further putting pressure on the one supplier model.
Insurers such as Zurich Financial Services are starting to offer insurance against disruption of the supply chain.
Even large successful companies can fall into a reliance trap. Thomson’s acquisition in April 2008 of Reuters diluted down the dependence on Wall Street and the City by bringing in strong tax, legal and scientific databases. However Wall Street and the City still account for 60% of sales and around 50% of profits.
Owners of private companies need to understand the massive long term impact of these dependencies. That large order is great for cash flow but there is downside unless key strategies are deployed. Left unchecked, it is easy to let that one customer dominate your sales line for the next 5 years. Your culture, your identity and your margins are then shaped by the actions of that one large customer.
Use dependencies to grow your business quickly. Use large customers as testimonial, showcase sites to help you win further landmark clients. Let key supplier relationships create stability to allow you to put in place more strategic supplier partnerships.
Learn from your dependencies quickly and build a more diverse, sustainable business using these special relationships as a springboard for more success.