Can a supplier rely on your business too much?
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This may seem an odd question after all if your supplier is heavily dependent on your business, then surely they will move heaven and earth to ensure that they meet your needs. From a superficial point of view this seems a very fortuitous position to be in. After all, when things go wrong, then won’t they be able to put things right, simply because they do not want to lose your business?
Well that is one way of looking at it, but there are some issues that need to be considered before a proper answer can be put to this question.
One key issue that needs to be looked at is flexibility within the supply chain. For the supply chain to be efficient and effective it has to be flexible. Now undoubtedly your business will experience peaks and troughs in terms of demand. This will have a knock on effect in terms of your suppliers.
So sometimes you will want a whole heap of supplies, at other times you will want the bare minimum. Can a supplier who is dependent on your business cope with these fluctuations?
Although it is easy to say ‘Yes, because they will want the business’, it may not be as easy as this. For example, if the demand forecast has been that over the next three months your business will want 10,000 items, but in fact you only want 3,000, how will the supplier store the extra 7,000 items? They will have to keep them stored at the correct temperature, free from dampness, make sure that they are not stolen and so on and this will use up resources, which will eat into their profit margins. If they are dependent on your business then they will only be earning a fraction of what they should have been earning and are having to use up resources to store the extra items. This makes them extremely vulnerable in terms of being able to withstand long periods of low demand.
Conversely, can they cope with huge demand. If they are really dependent on your business and the projected forecast for demand was 10,000 items but suddenly you need 100,000 items, then can they suddenly produce these out of the air? If they had a large number of customers they may be able to ‘borrow’ from other orders and make up the deficit pretty soon, but if they are wholly or almost wholly, dependent on your business, then it can make them pretty inflexible.
From a clinically business point of view this inflexibility is not good in terms of the supply chain. The supply chain should be flexible and able to cope with fluctuations, since these changes in demand are actually inherent to any supply chain and as such need to be allowed for. Having suppliers who are dependent does not augur well in terms of flexibility.
Moreover the dynamics of the relationship need to be looked at. Within any good supply chain the dynamics need to be that of a mutually beneficial relationship, where each party is independent but working together on the basis of trust and respect. If the supplier is dependent on your business then they will be dependent on you; there is no getting away from this. This does not sit well with the concept of being mutually beneficial and the dynamics of the relationship are skewed somewhat.
It is almost like the saying ‘Don’t put too many eggs in one basket’. If a supplier has few customers and you provide much of their income, there has to be an issue about whether or not they can be flexible and accommodate your needs. So although there may be benefits in terms of the supplier being keen to help you, there are certainly some disadvantages as well.