There are two sorts of relationships a large buyer can have with their smaller suppliers — one toxic and unhealthy and one that helps them both to grow and be successful.
By Mark Coxhead, CEO and Co-Founder of TradeBridge
The larger company feels they should be in control of the relationship because they are bigger and hold the purse strings. However, the smaller company, the ‘David’ in the relationship, have the goods and are not going to be pushed around. The big danger in this relationship, is it creates a winner and a loser. In reality, both companies will be much better off creating a win/win relationship so perhaps a better example of this is the crocodile and the plover bird.
After having eaten, the crocodile opens its jaws wide and lets the little plover bird pick out the bits of food stuck between its teeth. Of course, the crocodile could kill the plover with one snap of its jaws, but it knows both will benefit more from letting it live. It’s called a symbiotic relationship and it’s something that large suppliers and smaller buyers can both benefit from.
Similarly, the growth of both buyers and suppliers is often intrinsically linked. Buyer growth, and therefore an increase in demand on the suppliers, is clearly an opportunity for everyone. But it can also be a challenge – if the suppliers fail to meet the demand through lack of funding, the buyer is left without vital resources and vulnerable to competitive challenges and market forces.
Here are a few examples how this can manifest itself:
In common with many other internet-only business models, the success of internet marketplaces such as notonthehighstreet.com (noths.com for short) is wholly linked to securing enough crafty people to make and list creative goods for their website. Of course, it is also attractive for a craftsperson to expand their reach from local markets and word of mouth to a national (or even international) audience. If their product becomes a hit however, they are unlikely to have access to the funds they need to scale quickly. This will lead to lost sales for them — and for noths.com.
In another context, Uber and Just Eat, key to their success is attracting enough suppliers to meet the needs of their customer base and make sure they are ready to deliver (food or rides).
Similarly, a particular skills shortage can leave larger more established businesses at the mercy of much smaller subcontractors. For the past few years, as the UK has been on a housebuilding frenzy, there has been a huge shortage of bricklayers. This has led to a situation where, no matter how large the housebuilding company, it is the small bricklaying subcontractor who regularly dictates the payment terms.
Whilst other subcontractors often wait 45 – 60 days for payment, bricklayers usually get paid inside two weeks. Inconsistencies in supplier payment schedules increases process complexities and can cause friction on site.
At the end of 2017, there was a crisis in the steel industry, caused by a shortage of graphite arc furnace rods. The two major countries producing the rods are China and USA. And forces conspired to hit both countries at the same time. Chinese production was cut as a casualty of their anti-pollution drive, while at the same time Hurricane Harvey temporarily curtailed work at a major site in the United States. The curtailment in China has since abated somewhat but will not go away completely. The impact of Harvey was short-lived and faded by the middle of 2018.
However, for at least six months there was a huge worldwide shortage in graphite arc furnace rods, which resulted in big steel mills being forced to effectively pay in advance to secure supplies of carbon graphite arc rods.
In all of these examples, elements of supply chain finance have been used, or could be used, to ensure that the larger company is able to maximise their own growth whilst maintaining, or even improving their negotiating position with suppliers.
For example:
A number of supplier finance programs allow small time traders on marketplace websites the opportunity to use data from their trading activities as ‘collateral’ for working capital finance, and the bigger players such as Amazon are rolling out their own financing products.
Uber and Just Eat provide a range of financial products that enable their suppliers to access preferential finance for vehicles and other items required to meet the needs of the end customers.
Many construction and housebuilders provide supplier early payment programmes to allow ALL their key contractors access early payments for their applications at competitive rates.
“Early payment programmes” are just one option to support key suppliers, with innovative supply chain funders delivering programmes that offer more funding to help clients (and their suppliers) grow.
In 2019 and beyond, as UK and international businesses continue to compete aggressively at home and abroad, cleverly designed supplier finance programmes will continue to be used to make large companies much more attractive to vital suppliers.
When talent or materials are in short supply, this becomes even more apparent. This is why the financial directors of most complex businesses with a wide supply base, choose to include some form of supply chain finance as part of their working capital toolkit. Supply chain finance is about much more than money. It can be the critical element in ensuring a rolling supply of a vital component or securing the loyalty of a partner that is in demand with your closest competitors. It means you can create a much healthier and more symbiotic relationship with your suppliers and save the competing for your competitors.