There is a rule of thumb in business that says that if any customer takes more than about 20-25% of your business then you need to start to get worried. I would expand that to include suppliers as well. It doesn’t matter if you have a great relationship with them or that they have been around forever, that amount of exposure on an ongoing basis is not healthy for any business.
Why? Particularly, in today’s economic climate we can never know for certain what will happen and how changes in other parts of the market will affect us or the people around us. So, it is good practice to review our exposure to clients, suppliers and partners on a regular basis.
Take the high-profile example of Zavvi that went into administration a couple of years ago following the collapse of Woolworths. The store relied on Woolworths‘ distribution branch Entertainment UK (EUK), which was reputably a healthy part of Woolworths business, to deliver its CDs, DVDs and video games. However, when Woolworths went down it took EUK with it which subsequently had a knock on effect on Zavvi as it was not able to deliver any products bought online, an essential element of its business model.
Another more recent example is The Magazine Marketing Company which went into administration last month, amid fears that it would drag down a number of specialist magazine publishers with it. An article in MediaWeek said that cash-flow difficulties left it unable to pay its publisher and transport company clients. The article went onto say that:
The reason for MMC’s collapse is thought to be a combination of lower interest rates, which squeezed the company’s profit margins, compounded by a late invoice for March from its largest client, a collectables business based in Spain.
There have been many other stories like this over the last couple of years.
So, be careful about relying too much on one customer or supplier as you cannot be sure how exposed they are and to who. Keep a diverse customer and supplier base or, at least, have a back up plan or contingencies in place if you are over exposed. Better to be ready than sorry.
Have you come across other stories of over exposure that has had a material affect on businesses you have come across?
Thanks to somadjinn for the image