The perils of over-reliance

Three examples of why you should always have two suppliers for every key part of your business, if at all possible.

On 12 February 2008, two days before Valentine’s Day, we got a phone call from our (market-leading) courier partner: “Hi. There’s a problem with your packaging; it’s leaking. I’m afraid we’ll have to manually process all your orders. That will mean a £5.00 surcharge [on top of a similar normal charge per unit].”

Given we were set to send about 4,000 units through that partner that week, this would have cost us an unbudgeted £20k. We had to switch all our volume to a second courier with whom we had integrated, without our main courier knowing, to cover for this risk. We dumped the first courier permanently on the basis of their duplicitous behaviour.

The takeaway: suppliers will attempt to price gouge if they think you are single-sourcing from them.

In spring 2010, we decided to bring a chunk of our buying in-house, rather than pass it through our Dutch buying-partner. We discussed this with them well in advance as we wanted to give them a heads up so they could adjust. We said we were planning to keep a sizable chunk of business with them but do the simple stuff ourselves. They went bananas, threatened to pull out altogether and refuse to supply us in the interim, all in an attempt to get us to reverse our decision.

We had a second supplier lined up ready to step in, just for this eventuality. I said “go ahead, but then you’ll lose all our some of it.” They backed off and we are still working together.

The takeaway: suppliers will attempt to throw their weight around if they think you are single-sourcing from them.

At Christmas 2010, our courier’s depot got snowed in, with the roads too icy for HGVs to get through. The depot had no snow plough and ended up being closed for a week. Then, a policy of 'streaming' was brought in for the rest of December. Streaming is a fancy way of saying “we won’t deliver your product, except to a few postcodes, so there”. Christmas is one of our three busiest periods of the year; flower businesses count on this time of year to make profits that cover the leaner months so this could have been a catastrophe.

Following our previous courier issue, we had a back-up whose hub was not buried under snow and catastrophe was avoided.

This should illustrate three of the main reasons never to single-source: you’re open to exploitation, it’s hard to negotiate and if the supplier fails, you fail. No one thinks it will happen to them. Well, perhaps it won’t but you’d be silly not to plan for it, just in case, especially in business critical functions. Here are three more top tips for dealing with suppliers:

Competition means better pricing

There’s a reason that governments don’t like monopolies and that’s because competition for customers leads to competitive pricing. You should, as much as is possible, try to create a competitive environment when dealing with suppliers so that you get the best deal possible. The more successful you become, the better price you can get. Don’t be afraid to renegotiate if things start going well and you’re buying more from your supplier.

Price is not the only thing that matters

Payment terms can also be very important and if one company offers much better payment terms, this may be worth it. Pre credit crunch at least, even a new business didn’t find it that hard to get credit from suppliers. There is a lot of focus put on raising equity from angels, friends, family and so on. But a lot of the funding requirement can in fact come through credit from suppliers. One of our suppliers pointed out this out to us once: “How come you owe me more than your investors put together and I own none of the business?” Cue awkward silence, shuffling of papers and then saying briskly “Anyway, moving on...”

Contracts are good

Contracts are a pain but they are worth the effort. The issue with doing business on a handshake is not so much that people renege on handshakes (although that can happen), but that handshakes are simply not as specific as contracts and can leave ambiguous details hanging in the air. This is a really obvious point but actually a very common mistake and it can be a real pain to unpick once it’s happened. If you’re not going to have a contract, at least ensure you have all the key terms, such as prices, discount structures, payment terms, credit limits and lead times set out in a heads of terms that you can refer back to if there’s ever any doubt.

Will Wynne is the founder of Arena Flowers