The Danger Of A Big Customer: G T Advanced Technology's Bankruptcy

Source: Forbes

The bankruptcy of Apple supplier GT Advanced Technologies (GTAT) offers lessons to all vendors to large companies. Whether supplying a physical product or a service, smaller companies selling to larger companies have to be cautious.

Selling to a giant, such as Apple or Walmart or Bank of America, offers the potential for tremendous revenue. However, selling to a whale risks having no other customers to sell to.

Some companies have succeeded with one customer, but it’s a dangerous business model. The key is not having any competitors. If, on the other hand, you are one of several suppliers of a particular product, and you don’t have any other clients, you’re extremely vulnerable. The buyer is likely to play off one vendor against another, ensuring that none of them make much money. And if one of several suppliers goes bankrupt, that’s not a big problem for the buyer.

Thus, the first rule of thumb for selling to a big buyer is don’t go overboard. Maintain strong relationships with other customers. That may require your company to turn down some business from the whale, but sometimes turning down business is the key to long-run success.

The second rule of thumb is to be ready to produce other products. Some equipment is highly specific to one customer, while other equipment is more flexible. Flexible is good. This was part of GT’s problem.

For an example from another industry, think about French Fries. A McDonald’s fry is not the same as a Burger King fry, which is different from a Wendy’s fry. Differences include size, shape and coatings. The cheapest way to make French Fries is to buy machinery specific to one customer. That’s generally the way to get the lowest unit cost—specialize.

In the frozen potato industry, however, companies have been investing in just the opposite direction: more flexible equipment. They accept higher cost to get the ability to produce for one customer in the morning and a different customer in the afternoon. What they lose in cost per fry they make up by better utilization of their equipment. It’s easier to keep general-purpose machinery busy than highly specialized machinery.

It’s easy for me to tell someone else not to accept that big order from a whale of a corporation. It’s hard to look at a huge potential sale and not do everything possible to win the order. That leads to the third rule of thumb: think through maximum customer share ahead of time. Difficult decisions are always easier to make when they have been anticipated. How big a share of your total sales will you allow your largest customer to be? Think about that now, talk about it with the senior management team, then try to follow your rule.

You may end up with a higher concentration if you lose s smaller customer. That would be a signal to dial up sales effort for other smaller customers. Your big customer may ask for more of your product. I hate to turn down sales, but when your biggest customer wants so much that he will exceed your maximum, take the order but don’t reach for it. By not reaching, I mean don’t offer better pricing or guaranteed volumes.

The problem of the large buyer is a challenge. It’s a better challenge to have than no buyer at all, but it does require careful attention. GT’s bankruptcy is an illustration of how great the problem can be.