Sunday, May 11, 2014

The danger of discounts


SMEs, companies, death


The principle is always that the bigger the companies are, the better deals they can make with suppliers etc. and I am very certain that this is also the case. The question I ask however is why do the suppliers give discounts on deals to the big companies?



A fellow blogger wrote a very negative article concerning Ingvar Kamprad and IKEA. The article can be found here and is in Swedish but as always Google translator will probably do a good enough job.

The major negative aspects he brought up in his article was how IKEA push down the prices of their supplier extremely low by claiming they will go from three to only two suppliers so that they hardly make a profit since they want to keep IKEA as client and be one of those two.

What was even worse in my opinion was that the article writer claimed that especially IKEA stops delivery contracts mid-term and the poor supplier that has already paid for the large quantity of materials they ordered to be able to fulfil their part of the contract to IKEA are forced to shut-down their business, declare bankrupt and IKEA swoops in and buy the finished goods even cheap that what they would have paid before. This was one reason for why things are frequently disappearing from the shelves in IKEA so it is not only due to "design" and "seasonal" changes.

I do not know if what he wrote is true or not but if it is then it is indeed horrible examples of bullying behaviour from a large, pretending to be responsible, company towards smaller companies that have no chance to stand up for their actual legal rights against these giants.

Going back to the topic of this article then I simply do not understand how suppliers are thinking. Yes, they increase their revenue significantly the year that they get paid but their costs also increased significantly with potentially increased production space, increased personal, increased storage volume as well as space.

So the only way to keep the wheels spinning will be to land yet another deal which will probably only be made with an even bigger discount so your large revenue remains but the profit is significantly decreasing.

Most likely to even try to keep some kind of profit running you will start to decrease the quality of your material adding the risk of getting returns of faulty products and product parts.

One day that deal simply do not appear and then you are quickly burning the little cash that you had managed to build up with your increased volume sales and personal which in the end leads to bankruptcy and crushed dreams.

As a small company one must be double scared when working with the giants. Best thing is all together to avoid product sales to them and simply make licensing agreements with them producing the product themselves or outsourcing of product production even though I personally hate outsourcing.

Any small company owner or supplier out there that have had a great experience working with a giant company?

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