If a business is to survive it needs to manage relationships with both its own suppliers as well as with customers. It also needs to consider the risk of being dependent on a supplier or customer.
The revelations about suppliers to Tesco and now Premier Foods are a graphic illustration of the danger of relying too heavily on one customer. A dominant customer can exert control over prices and margins and as in the case of Tesco, demand a raft of marketing support fees.
There is a point when the relationship can become no longer economically viable but if you are not prepared it can be impossible to terminate without putting your own business’ survival in jeopardy.
Many SMEs in particular, like farmers, have been forced out of business by not being able to say “no” to the demands of their supermarket chain customers. Research by accountancy firm Moore Stephens has recently revealed that 146 food producers have become insolvent this year, an increase from 114 last year, in part because of supermarket price wars.
It is not only an issue for food producers and superstore supply chains. Some years ago the Ford motor manufacturer put similar downward pressure on its suppliers, many of whom went bust. In the end Ford had to buy some out of insolvency in order to ensure continuity of supply and its own survival.
The lesson is that SMEs should not only avoid becoming locked into supplying only one customer, but also to learn to say “no” to pressure.
No business can exist in complete isolation. If businesses treat others as fairly as they expect to be treated themselves, then ultimately everyone in the supply chain can survive and benefit.