Lamoiyan owner Cecilio Pedro’s previous company once supplied aluminum toothpaste tubes to the likes of Unilever and Colgate. When the multinationals shifted to a different packaging material, Pedro launched Hapee Toothpaste, which is now giving these giants a run for their money.
Mega Sardines also used to be a supplier, but later launched its own line of canned sardines. It is now a leading brand and is outselling its former principals.
Bounty Fresh was likewise a supplier of dressed chicken to grilled chicken chains like Andok’s before it launched Chooks-To-Go rotisserie chicken.
Today, Chooks-To-Go has more outlets than all other branded chicken kiosk chains combined.
These examples show that there are many risks involved in suppliers becoming competitors, foremost of which is getting the ire of the customers and losing a supply contract altogether.
But what will make suppliers decide to compete with their customers or at the very least support the competitors of their customers?
Here is a list of 15 considerations that customers must keep in mind lest their suppliers one day become their competitors:
1. Suppliers do not make enough profit because manufacturers keep squeezing them to gain more profit instead of profiting from more sales of their products.
Or worse, the demand for lower cost comes with demand for higher quality simultaneously.
Hapee toothpaste competes directly with its former clients in the toothpaste industry.
2. The legitimate concern of suppliers like being paid promptly and in full has fallen on deaf ears; goodwill of the customers is lost as they fail to treat suppliers with respect as partners.
3. The relationship between manufacturers and suppliers is weak or suppliers feel like hostages in the relationship. This is especially true when suppliers deal with the formidable bargaining power of cost-based customers.
4. Suppliers need to persist for their employees to survive.
5. Suppliers have increasingly been delivering not just one part but a greater part of the manufacturer’s whole product.
6. Suppliers see unoccupied market segments ignored by customers and create a competitive edge in product features or pricing.
Customers, however, are not interested in any strategic partnership.
7. The cost of entry of new products of existing suppliers has become increasingly prohibitive, such that alternatives need to be considered.
8. The vision of the owners or new owners from the supplier side is to have an integrated operation.
9. Suppliers are uncertain of their future as manufacturers keep changing suppliers.
10. Suppliers will need to take action when their services are terminated or when they have unused capacity.
11. Relationships with customers are important and so any dishonest and critical pieces of information that have not been communicated promptly to the suppliers will cause rifts.
Mega was a supplier before it established its own line
12. Customers must be aware when there are no intellectual property rights as barrier to entry.
13. There is unequal balance of power when suppliers have access to a major channel of distribution of the customers.
14. The previous point is also true when suppliers have monopoly or near monopoly of supply.
15. There is instability at all points when the manufacturer’s brands are weak.
Manufacturers need to evaluate their supplier strategy and net out the effect of potential new competitors when considering any expansion effort.
The next time customers want to squeeze their suppliers, they may want to use this list of 15 considerations and assess if it is better to create a partnership than risk converting a supplier to a future competitor or losing a key supplier to a key competitor.
(Josiah Go is the chair of marketing training and advocacy firm Mansmith and Fielders, Inc. Follow his blog www.josiahgo.com. His seminar ‘6th Defending from Competitive Attacks’ is scheduled on Oct. 25-26, 2016; email info@mansmith.net for details)