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Thursday, June 3, 2010

No. 9: Do not rely too much on a big company

Big companies are decreasing the number of their suppliers in view of the current stagnant economy in Japan, and many suppliers are struggling to overcome the hard times. It is easily imaginable that they are surprised to have their business with big companies discontinued. They must have been optimistic about future business prospect because they are doing business with a big company. Even big companies are not free from stagnant economy. Because they are big, they have to try hard to streamline operations to secure necessary profits. They first lay off employers, and second decrease the number of suppliers.

What supplier is the first to be wiped out? Unquestionably, it is the supplier that has the smallest share in the supply market. Suppliers with a small share cannot satisfy the requirements of a big company in a short period of time when economy recovers in the future. There is no room to give consideration to human empathy. The decision to discontinue business transactions does not allow for any delay. No purchase agent of a big company wishes to lose a job as a salaried worker. As always, human is self-centered.

Many small companies are trying hard to do business with a big company by some means or other. However, they need to remember that big companies have to make a ruthless decision purely because they are big. They have to support the livelihood of many employees. There are three reasons why a small company wishes to enter into business relations with a big company. Every three reason is quite understandable, but it has pros and cons.

(1) As the big company is financially strong, the small company does not have to worry about debt collection. How do you explain the GM case? Even a super big company goes into bankrupt. In addition, if you establish business relations with a big company, you need to accept long drafts. Sometimes, you need to wait for 180 days to encash a draft. It is not a good idea to receive such a long draft in terms of cash management. You need to pay salary to your employees in cash for 180 days before you can encash the draft.

(2) Because an order is big, it allows a small company to have a big sales increase. You have to examine the profit rate of a big order you get from a big company. It must be extraordinary low, though the profit in value is rather fancy. If you get a big order, you have to cancel small orders from small companies to execute the big order. Suppose a big order from a big company discontinues all of sudden, you cannot escape from leaving your production resources idle. That is, you are not free from great fluctuations in operations if you rely too much on a big order. If you lose the big company, you will have to ask small companies to increase business volume despite the fact that you cancelled their orders in the past to execute a big order from a big company.

(3) Because a big company is famous nationwide, a small company can gain prestige. Most small companies think that they can maintain business relations with a big company forever once it succeeds in establishing business relations with them, and employees get intoxicated by the excitement to do business with a big company. Delighted with a happy future, they construct a new building and employ many workers to be prepared for a further increase of business. That is, they go beyond the border between fiction and reality. It is not unusual that a small company suffers from financial trouble once it constructs a new building to commemorate the steep business growth realized by the business with a big company.

It is said that a crab digs a hole suitable to its shell. That is, people act in ways that show their worth. It is the right strategy for a small company to do business with a small company. It is not advisable to reduce profit as much as possible to do business with a big company. Small companies should be very cautious about starting to do business with a big company unless it is equipped with technology unique in the world.

If a small company cannot secure a necessary profit rate from the business with a big company, it had better give up the idea of doing business with a big company without hesitation and think that it is not competent enough to do business with a big company, and make further efforts to develop its competitive edge.

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