Here’s some advice most companies don’t hear often: Limit your customer base. That counterintuitive strategy is the surprising conclusion of a new report from the National Center for the Middle Market.
The report, “The Perfect Link: How Middle Market Companies Operate Within Supply Chains,” offers six tactics middle-market companies can use to boost their supply chain success and keep customers coming back:
Put All Of Your Eggs In One Basket
Many business professors lecture about the need to diversify, and companies often hesitate to depend on just one or two customers out of fear that if one disappears, then so too might their business. However, the most successful middle-market suppliers tend to be dependent on just one or two critical customers, according to the report. These companies are also more satisfied with their supply chain management practices than are peers who serve more customers.
Having a sharper customer focus allows companies to develop deeper relationships with those they serve. The report shows that 9 in 10 fast-growing middle-market firms, which tend to winnow down to a few customers, describe their relationships as highly collaborative, allowing them to make adjustments based on customer needs. Both executive- and operational-level meetings with those major customers happen at least monthly, and customers typically provide feedback on quality, performance and delivery.
Give Up Control
The notion of letting a customer control your product development, data security and pricing might seem unnerving, but that’s precisely what successful middle-marketing suppliers commonly do.
In fact, 50 percent of fast-growing middle-market firms give their customers control or influence over the process of identifying and instituting operational efficiencies, the report shows. Almost half cede control on strategic decisions, quality control and the suppliers they use.
By contrast, middle-market firms that maintain tighter internal controls are more likely to serve a larger number of small customers. “These companies also tend to be smaller, slower-growing middle-market firms,” the report stated.
Become Mutually Dependent
Hanging your fate on only a couple of customers isn’t easy, even if it’s considered a recipe for success.
“Due to their dependence on only a few critical customers, most middle-market suppliers feel some level of pressure from their customers and may find themselves susceptible to the power dynamics of the larger corporations that they serve,” the report stated. “To help offset this power imbalance, middle-market firms work hard to ensure their customers rely just as heavily upon them.”
For example, suppliers that narrow their client bases tend to become the sole or primary suppliers for products or services for those clients, turning those clients into “captive customers” who are loath to switch to new suppliers. This results in intense mutual loyalty.
In fact, 70 percent of fast-growing middle-market firms feel their customers would help them out if they ran into financial difficulty.
Seek Out Assistance
The most successful middle-market suppliers emphasize teamwork across their operations, including in how they work with customers. About 40 percent of middle-market firms participate in supplier councils, which help them learn best practices and collaborate on how to solve problems.
Typically, middle-market firms handle supply chain management in-house. However, they sometimes turn to third parties to meet customer requirements for speed, accuracy and safety. More than half of middle-market businesses use third-party logistics to manage aspects of the supply chain, primarily transportation and warehousing, as well as to gain access to tools and software to increase supply chain transparency. This allows companies to focus their internal resources on tasks such as developing products while still gaining greater visibility into the supply chain.
Lean On Your Suppliers
While middle-market firms are narrowing down their customer bases and giving them more control over operations, they expect the same relationship with their own suppliers. The best-performing middle-market companies work with fewer suppliers and enjoy close relationships with them, often integrating business systems such as IT, payments and logistics.
“Middle-market firms typically have a say in their suppliers’ business decisions, especially related to product development specs,” the report said.
Cover Your Back
Giving up control doesn’t mean letting down your guard. Middle-market firms are still keeping close tabs on customers and suppliers, including monitoring their financial health. Most take some action to protect the company against a major customer or supplier disruption and are mitigating operational and cybersecurity risks.
To date, most of the research about supply chains has focused on the needs and perspectives of the larger manufacturers and distributors on the ends of the support chain. “The Perfect Link” highlights how middle-market firms — often critical links in the supply chains of other larger companies — can succeed by taking a different approach.
“The research shows that the best middle-market suppliers tend to be the largest and fastest-growing middle market companies,” said report author Thomas Goldsby, a professor at the Ohio State University Fisher College of Business. “Middle-market companies of all sizes that adopt the practices of top performers stand to benefit by improving their service levels and enhancing their value to their critical customers, and likely seeing their own revenues grow as a result.”