When a supplier has business greater than capacity you are placed in a difficult place as a customer. In the short term you could see a delay in getting orders filled and in the long-term you are likely to see an increase in the supplier’s price to you. There are two key strategies a business should follow faithfully that must be deployed immediately. Actually, if the second is done consistently you never need the first.
First you must fix the problem when your single or sole supplier says they cannot meet your delivery date because they are at maximum capacity. In some cases this message will come with the option, or threat, that with a premium they can run an extra shift to meet your needs but at an increased price for the order.
When the supplier told you they are maxed out of capacity work diligently with them to make sure that you are able to meet the demands of your customers. This is true whether or not you are dealing with a raw materials company supplying your manufacturing facility or if you are a retailer buying finished goods. Whichever you are, your customers are not going to allow you to have insufficient quantities available when the customer desires it. Negotiate with your supplier to expedite delivery as quickly as possible. The supplier may attempt to demand an up charge but if you are faithfully giving advance orders or adequate forecast this will be easy to negotiate away.
If the supplier is not willing to or is unable to supply you in a timely fashion even with this negotiation it will be necessary to quickly find another supplier. This is not always reliable because the new supplier will not have a relationship with you or be comfortable with you. Mitigate this problem by promising future business classified this initial order as a "test".
Strategy 2: Preventing further problems
When your immediate problem has been alleviated go to the second strategy. Of course if you follow this strategy diligently you are not likely to run into the problem we have been talking about concerning an overcapacity supplier.
With each supplier you need to monitor their business versus their capacity and how much of their business is derived by your orders. Your goal would be to be a large enough customer where you get preferential treatment but not so large that if your business increases dramatically that the supplier will not be able to grow with you.
The analysis can be tricky, particularly if it is a private held company, this important step will prevent you from getting into the situation where the supplier is unable to meet your needs in the future.
The goal is to always have a back-up plan should your normal supply channels be interrupted. This prevents you from being held hostage by a sole supplier while also affording you the ability to do validity checking on the main supplier’s cost and lead time.
©2014 Max Impact, used with permission.
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