How many times have you heard- or said- something like, “Volume covers all sins”?
Or, similarly, “If we could just produce and sell more, then so many of our problems would go away.”
The relentless pursuit of big volume has been touted as THE way forward for so many manufacturers.
It is wrapped-up in consultant-speak such as “achieving scale,” “maximizing efficiency,” “leveraging core competencies” and the like.
And while these are valuable notions for some, they are not the panacea for most.
The reason is that pursuing volume often leads to the rise of all-too-powerful customers; who ultimately are able to dictate the terms of the relationship.
In our book The Distribution Trap, Timothy Wilkinson and myself detailed what we call “The 10% Rule.”
Simply stated it is this:
A company that has a single customer, which is more than 10% of its total business, puts the company at big risk.
This stems from our research that found companies who allow >10% customers are more likely to experience wide fluctuations in their profits and market share.
Putting a lot of eggs in one -- or even a few baskets -- can prove wonderful so long as those big customers stay profitable and loyal.
However, the minute the customer leaves or threatens to do so unless a lower price point is met can be catastrophic.
How many of us remember when a major account announced they were taking their business somewhere else unless they got a dramatic price reduction?
Such moments can cause grave harm; or even threaten the entire future of a company.
Interestingly, management accounting recognizes this risk as well; and, requires a company to report and disclose the presence of their big customers.
The language under the SFAS 131 Requirements follows:
"The standard requires use of the management approach; that is, segment reporting depends on the firm's internal organization. The standard defines an operating segment as a firm component
- that engages in business activities generating revenues and incurring expenses
- whose operating results are regularly reviewed by the enterprise's chief operating decision maker to allocate resources and assess performance
- for which discrete financial information is available"
Speaking specifically to “The 10% Rule”, the requirement continues:
"Reportable segments are operating segments that report any of:
- revenues (including intersegment revenues) of at least 10% of total revenues (including intersegment revenues) of all reported operating segments"
Something to think about the next time your biggest customer wants to place an even larger order… Despite the temptation, it might be better to just "say no."