Running with the Big Dogs

The Big Dogs work on a simple principal we know in our industry - JIT. In the retail business it's all about cash flow. The manufacturer ships to a distribution center that quickly moves the goods to a retail outlet. The retail store is heavily invested in how fast it can move the goods out of the store into the hands of the customers and then replenish the stock. Profit is made by low margins and high turnover. If the turnover rates aren't achieved, the product is dropped. This particular customer has about 150 distribution centers servicing 4000 stores. They are masters of logistics, to the point that the Armed Forces have studied their model for the optimal method of supplying the troops.

When a molder who counts sales in the low millions of dollars does business with a customer who does business in terms of billions of dollars there are some things to pay special attention to:

Any customer who is more than 5% of your business essentially owns you. If he suddenly increases or decreases his orders, your little operation is thrown into chaos if not bankruptcy.

A large influx of orders will require strict cash flow management on the molder's part. You'll have to increase your line of credit with the resin suppliers; you'll have to have a guarantee of when your invoices will be paid; and here's the rub: what if they decide to stall your payments? You quickly go on COD with the resin suppliers, and your bank suddenly is no longer your friend.

How do you handle quality? What if your get a LARGE reject? Having a $100,000 reject shoved down your throat with an immediate demand for replacement (at your cost) is a ship sinker if you're already financially leveraged.

What about logistics? What my client failed to recognize was he wasn't selling to one customer. If you read the purchase orders from The Big Dogs, you'll see in the fine print some very short words about UPC codes required on the boxes. Most of these companies are more than happy to label the product with one UPC code, however the master carton is labeled with a UPC code that tells the distribution center which store to send it to. A separate UPC code is also on the master carton identifying the location of the specific distribution center.

Molders don't ship products. They ship (sell) master cartons filled with a specific number of shelf-ready products inside. This means my client has one set of labels for the individual product but he'll have to manage 4000-plus individual UPC codes for every shipment he makes. The Big Dogs are insistent on proper packaging. Mislabeled shipments are summarily rejected and penalties assessed for late deliveries.

So how do you handle this?

1. Look at your own infrastructure and automate it as much as possible. Working with the Big Dogs is a high-speed dance. If you can, invest in automated labeling, and not just labels but automated printing directly on your master cartons. The trick here is to have your computer talking with their computers without the need of paperwork and people.

2. Have a clear definition of quality. A bad part must be obvious to the retail customer. It's a nasty trick when a customer over orders and doesn't want dead inventory to pull a quality audit, finds a dimension that's .001 out of specification, and then rejects it. This is a common ploy with the automotive industry.

3. Standardize your packaging and don't accept split shipments. If you sell a master carton of 500 widgets, don't accept orders for 100 or 750.

4. Have your customer post a surety bond with your bank to guarantee you're being paid as agreed to so that you can pay your suppliers and employees.

5. Have a policy manual clearly defining the size of your JIT warehouse, what happens in the event of a reject, changes in resin prices, penalties for late payments, and who pays for what if the Big Dog decides to drop you and your product - what do you do with your stock, your resin purchases etc.

Most Big Dogs will laugh at and ignore the request from them to sign your policy manual. They will actually require you to sign theirs. READ IT CAREFULLY. Then read it again. Then give have your local attorney explain it to you. There is no obligation to you until you sign it. Then you're in bed, and you usually can't afford to get out. Before you sign, get something you can live with. (Hint: there's no such thing as 3-year fixed pricing for anything.)

6. GET EVERYTHING IN WRITING, in plain language not legalese. Things will happen so quickly that you won't have time to remember. AND if it isn't in writing, it is meaningless.

Looking at a potential contract with the Big Dogs is like seeing the proverbial Pot of Gold and being told how you can get it but not the consequences of having it. This is no longer a friendly chat with your buddy the buyer. There are no friends in business, just business associates.

Many companies have figured out how to be very profitable suppliers to the Big Dogs, quite like the successful Tier 1 suppliers. However they are very smart as to how to do business with them. Those who thought they could 'manage' the Big Dogs are out of business. It is better to turn down an opportunity that could bankrupt you than it is to think you can out-play these guys. They hold all the money and you are 'Little People'. It means nothing to them if they put you out of business.

As we tell the kids in Little League. "Play Safe. This particular game is less important than the season."

Think about it.

Bill Tobin