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Distributor's Link Magazine Winter Issue 2017 / Vol 40 No1


38 THE DISTRIBUTOR’S LINK Jim Truesdell James Truesdell is President of Brauer Supply Company, a distributor of specialty fasteners, insulation, air filtration, and air conditioning with headquarters in St. Louis. Mr. Truesdell is adjunct professor at Saint Louis University and Webster University. An attorney and frequently published writer, he is the author of “Total Quality Management: Reports From the Front Lines”. WHEN THAT BIG CUSTOMER CAN MEAN A BIG RISK TO YOUR BUSINESS Getting that big customer, developing a relationship with a really large buyer, and being partner with a large commercial customer... these are all the dreams of a growing wholesale distribution business. It would seem to be a “no brainer” that this would be a goal for which we all strive. Think of all the dollars of revenue which can keep your business in the black for a long time! But the reality is that reeling in that big fish can often bring problems for a small business. What seems to be a really good thing can rapidly become a source of worry to management. Once a business gears up its capabilities to take care of that large customer it may have added considerable overhead. This includes more employees, storage space, delivery capabilities and committed capital all in the service of meeting the demands of this one buyer. Unfortunately, that new revenue can disappear more rapidly than the increased overhead can be shed. When there is too much of a “concentration” of business in one or a very few customers it sends up red flags to lenders, investors, and vendors extending large credit to an enterprise. A normal sticking point is often considered to be ten per cent of total company sales volume centered in one customer. That one big customer would seem to bring about economies of scale which can reduce overall operating costs. There are a lot of negatives that come with it however, these include: [1] Increased credit risk if the large receivable suddenly goes bad. [2] The bargaining power of that large customer can drive prices down and diminish overall company gross profit margins. That big customer might add ten per cent of sales but sometimes the percent of GP is much less. [3] The relationship with the customer can often depend on one (or a very small number) of a distributor’s employee associates. Loss of a key employee can frequently lead to loss of the customer. CONTRIBUTOR ARTICLE CONTINUED ON PAGE 112


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