Building Supply Chain

One rainy Amsterdam morning

This was not going to be good. I was quietly contemplating how much money we could lose on this deal. I took a sip of strong coffee, to shake off my jet lag, looked at the CEO of LM, the number 1 manufacturer of wind turbine blades in the world, and got back to negotiating my first cross-border multimillion-dollar deal.

It is hard to get suppliers to work with your startup. You can’t give them a guarantee that you will eventually pay because you don’t really know if your product is going to work as advertised and you don’t know exactly how and when your customer will pay you. Those who agree to supply you will demand 100% upfront payment. And then, you will not be their number 1 priority customer.

Meanwhile in Moscow

How to make sure, that suppliers support your scaleup? Everything seems to be going against you. Well, as in all cases when it is you against the world, you first prioritize, then execute. The work of getting your suppliers starts with finding not the right supplier, but with finding the right customer. When you can show your suppliers that you have a customer, who is ready to buy from you in the long term, wonderful things start to happen.

We were building the wind industry in Russia from scratch at the time. There was no supplier base. But we had secured 660 MW of capacity in wind auctions. In effect, we were the customer. This made searching for suppliers relatively easy. We could offer each supplier a 5 years perspective. As a result, a lot of them invested money in buying very sophisticated machinery, like a 15-meter long and 8-meter high metal press, to make very specific tower sections for our wind turbines.

Back to Amsterdam…

One example was absolutely off the charts. The design of our wind turbine assumed only one specific type of blade, produced exclusively by the Dutch company LM, which was at that time still independent from GE (it was bought right as we were negotiating a deal). We couldn’t change the supplier. Doing so would mean another 1,5 years of design and testing. We didn’t have that time. It is hard to think of a worse negotiating position.

So we were sitting at the Schipol business district of Amsterdam, in the LM office, and negotiating 400-something 50m blades. LM had only one factory open, where they were making them, and they were thinking of closing it. We got a deal, that the blades will be delivered, with a progressive discount. The first blade would have a small discount, but with each successive batch the discount will grow, and the last blade will come in at a double-digit discount, lowering our blade costs several times.

LM too had an interest in keeping their factory going for a few more years. Their capital costs have been paid off long ago, so all they had to do was cover the operational costs and earn some profit. This allowed us to negotiate such a nice progressive discount.

And off to Korea

But what if you don’t have a nice, long, juicy offtake? Well, don’t despair just yet. A friend of mine, Duke Oh from Korea, recently launched a startup in manufacturing lithium-ion electrodes. He had zero offtakes, and his team is working hard on getting sales (full disclosure - I’m helping Duke on an agency basis with sales). Electrode manufacturing is highly complex and knowledge-intensive. You need excellent machinery and highly-trained personnel.

What Duke did, was that he got the main equipment supplier as an investor. This created confidence along the whole supply chain. In turn, this enabled Duke and his team to focus on perfecting the manufacturing process and on business development.

How to build trust

You can say that your business is as good as your supply chain. As a pre-seed or A-series startup, you don’t need to worry much about it. As you start to scale, the supply chain can make or break your business. As I hope I’ve shown in this article, building a supply chain is not about procurement, or getting the lowest bidder. It is first and foremost about building trust with your suppliers.

It is all nice and coachy to say “build trust”, but how exactly? Let me summarize the takeaways from my own experience and from those I trust.

First, get a solid sales pipeline, ideally an offtake. This will show suppliers that customers trust you and that now they have a chance to help you execute this sale. This is what we’ve done in our wind business in Russia. We started by going to the auction and securing the 660 MW pipeline.

Second, get investors on your side. Having just received a check from investors works wonders. But don’t get too excited, as if this is your only trump, then the supplier will still push for a 100% prepayment. And discounts will be rarely seen. When I was launching the wind business, after securing the pipeline we got all the necessary funding from the banks.

Third, get a supplier to be your investor. Make them have skin in the game. This is what Duke has done, without having any significant sales contracts signed. Now, you’ll have to tread carefully here, as later you might want to switch suppliers.

Building a supply chain is more than just a series of transactions. It’s about forging relationships and building trust. From my globe-trotting examples, the lesson is clear: your suppliers are your partners. You need to show them that you have solid customers and secured investment, and, when necessary, get them invested in your success. This isn’t about getting the lowest bid; it’s about creating a network of trust and reliability that can withstand the pressures of scaling up. So, whether you’re a startup or a scaleup, remember that your supply chain can make or break you. Build it wisely, and it will be your greatest asset.