Practical Solutions to Business Puzzles

Our discussion of why Connie Customer and Sam Supplier would want to build a long-term business relationship continues. 

How might relationships that lower cost, are easy to use, offer predictability, provide referral opportunities, streamline operations, and capitalize on synergies add value for Connie and Sam?  The answer depends on the situation that Connie and Sam are facing.

Today, let’s suppose that Connie has just been told that a major customer wants to do business with her.  This happens and, when it happens, it puts small businesses in an awkward situation.  A small business owner like Connie may face issues such as:

1. An immediate needs to ramp up operations.  This sounds like a great problem to have.  For many businesses, ramping up to support a large customer creates a tremendous strain for the existing infrastructure and relationships, internal and external.
2. Limited funds may be available for expansion.  Often supporting a large customer may require a firm like Connie’s business to dedicate staff to support the large customer, especially early on in the relationship.  More office space, customer service representatives, computers, telephones, software licenses, travel, and office expenses are just a few of the expenses associated with expanding a business to support a major customer.
3. Deciding if Connie can afford to win the business at this point.  One of the hardest things that a business can do is to walk away from business.  If a business is unable to meet the needs of a large customer, it is important for that business to walk away so that both businesses can have a positive relationship when theh small business reaches the point that it can support the large customer. 
4. Substantial outlays may be required to support the agreement.  Depending on Connie’s business, she may be required to combine her products and services with those of other firms, such as Sam’s products. 
5. Addressing infrastructure and scalability issues while maintaining the attributes that customers value.  Customers often select smaller firms like Connie’s business because the customers value customer service, responsiveness, flexibility, and ease of doing business with the smaller company.  Of course, the smaller firms also need to offer products and/or services that meets the customers’ needs. 
6. Continuing to meet the needs of existing customers who are concerned about Connie’s commitment to their business.  This is a typical reaction of customers when a business like Connie’s firm suddenly has a relationship with a new customer and meeting the needs of the new customer forces rapid expansion of the business.    
7. How dependent Connie wishes for her business to be on any one customer for most or all of her revenue.  If Connie’s business is dependent on a single customer for most (or even all) of its revenue, where will the business be if the customer is dissatified, reorganizes, is acquired, decides to sell pieces of its operation, or faces an economic downturn?  Many firms establish guidelines that suggest suppliers not be overly dependent on their business as a source of revenue.  Many firms would suggest that their business should not provide more than 25% to 30% of the annual revenue for Connie’s business.  
8. Bargaining power and resources in the event that a dispute arises between Connie and her customer.  This is a tremendous challenge.  Issues can arise, especially if Connie and her customer have not worked together previously.  The best time for Connie and the large customer to decide how to deal with an issue is at the start of their relationship.  That way, both firms are positioned to make good business decisions and they go into the relationships with firm expectations about how to proceed.   

Do these sound like concerns that you would have, if you were in Connie’s situation?

Now that the concerns have been identified, let’s think about how Connie’s relationship with Sam might help her deal with these issues. 

Cost

An existing relationship with Sam might enable Connie to lower her costs associated with ramping up and the outlays required to support the relationship. 

In many cases, a firm in Sam’s situation might be willing to help with the ordering process.  That can take a variety of forms.  Perhaps, Sam has an online ordering mechanism that can be tailored or replicated to support orders by Connie’s customer.  In other instances, suppliers like Sam have been willing to provide their customers with more favorable credit terms or even repayment that is linked to payment by Connie’s customers. 

Much of the time, a firm in Sam’s situation will increase the discounts to reflect the additional business which it is likely to realize. 

The nature of the relationship between Connie and Sam often determines the steps that Sam is willing to take to help Connie in this situation.  The book that I am currently writing will talk about actions that a person can take to build relationships that lead to more support from suppliers.

Predictability

In this situation, predictability is critical for both Connie and Sam.  Connie needs to be able to focus on her business and on her new customer.  She is going  to have great difficulty focusing on her business and her new customer if Connie is uncertain what to expect from Sam.  

As you realize, issues frequently arise in relationships with new customers as the parties being to understand each other.  Payment delays, invoice questions, and differences in expectations sometimes go undetected until the relationship starts.  My book on building relationships discusses several techniques for managing this risk.

So too, Sam needs to know what to expect from Connie.  Will she be prepared and organized?  Is she going to educate her customer so that the customer seldom needs to change orders?  Returns increase Sam’s cost of doing business with Connie as well.  He needs to understand what to expect so that Sam can make appropriate business decisions as well. 

Referral Opportunities

When Sam understands Connie’s business and how she makes money, he is better positioned to make referrals that will be of value for her business.  If Sam is able to make such referrals, he can help Connie manage her dependency on the large new customer.

Conversely, when Connie understands Sam’s business, she is better positioned to make referrals that will have value for his business.  In many cases, Connie’s new customer will need products and services that Sam might be able to offer which are outside the scope of Connie’s relationship with the customer.  Where Connie knows Sam and knows that he will meet her customer’s expectations, she is far more likely to make introductions than she would make if she did not have a relationship with Sam.

Streamlining Operations

When relationships being, there are two typical results.  On the one hand, it is possible that the firms will have no controls in place.  Connie and Sam may be acting on the assumption that their expectations are the same.  At some point, an issue is likely to arise and they will implement controls to avoid problems.  In many cases, they go from having no controls to having iron clad controls as a “knee jerk” reaction to issues.  On the other hand, Connie or Sam may have experienced issues in a prior relationship and be concerned with avoiding a repeat.  In this situation, they are likely to start with iron clad controls. 

A better way of handling this issue is to identify consequences that can arise and to have contingency plans for dealing with such issues when they do arise.  There are tools for implementing such approaches from the beginning and some of those tools will be discussed in my book about building relationships.  In other cases though, Connie and Sam would likely evolve to controls that meet their needs by trial and error.  In many cases, firms miss this opportunity because they focus on what is needed (process), rather than why it is needed (to meet needs of the business). 

Capitalizing on existing synergies 

Synergies often exist between customers and suppliers. 

When the Connies and Sams build relationships and understand each other, they are far more likely to find other areas in which they can work together to increase efficiency, improve effectiveness, and lower cost. 

If the other person is just a voice on the other end of the telephone who fills an order, Connie and Sam are likely to miss tremendous opportunities to work together and to help each other build better businesses through business relationships.

Coming next, we will talk about a situation in which Connie and Sam work together to deal with a supplier consolidation effort by Connie’s customer.