When looking at a company and analyzing risk, customer concentration issues are always top of mind. But one risk indicator that’s often overlooked is supplier diversification.
We’re working with a client right now who deals in manufactured wood products. But due to several current issues, wood-based industries are facing a significant hardwood lumber shortage.
Prices are climbing and many businesses report that growth is being constrained for lack of available resources. As one similar Midwest business owner said, “I can’t remember a time when we declined so many RFQs due to lack of materials.”
Our client recognized and responded to shortages early on by developing new supplier relationships. They put a lot of resources into addressing the issue, even transferring one employee from a sales position into a fulltime job of sourcing new materials. That way, when resources got critical, they didn’t have to pick up the phone and basically “cold call” for supply.
This is a marked difference to the way many companies manage their supplier relationships. There’s a tendency for businesses to find a good, trusted supplier and rely on them for the bulk of their material or product needs. If you find someone reliable, why not make your life easier and stick with a trusted entity, right?
But what would you do if your main supplier went out of business or had some kind disaster that choked off output? What if they sold to one of your competitors? How fast could you get new products and materials at what cost? You don’t want to be the person picking up the phone and trying to create new relationships at a time of scarcity.
We talk to buyers every day and we know that, more and more, buyers are looking at how many sources you have for your major materials. If you don’t have a backup for your key source, and a backup for your backup, they may downgrade the value of your company.
Yes, my wood industry clients are still feeling the pinch. But they took what would have been a negative and turned it into a positive by demonstrating to industry buyers that they’ve developed a diversified supplier network. Meanwhile, they’re continuing to grow and maintaining their margins.
Another tactic my client used was to gain favored buyer status by paying bills quickly. They’ve taken advantage of all available early-pay discounts and built up goodwill with their supplier base.
I know there are theories of how and when you should pay your bills, and many advisors will recommend holding on to your money as long as you can. But cash flow matters, and most suppliers would rather give a discount and get paid 10 days from invoice than wait 60 days for full payment. Relationships matter too, so build connections now, before you really need them.