Is Sacking a Customer Worth the Risk?

The customer is always right – except when you no longer want to do business them.

Firing customers is a valid risk mitigation strategy when the business they bring is under threat or unprofitable, or they are out of alignment with your strategic goals. But companies need to exercise extreme caution when choosing such an action, because it can backfire and create more risk.  

The Wall Street Journal reported recently that Jakks Pacific Inc. suspended sales of their toys to Sears Holding Corp.’s Kmart over concerns about Kmart’s financial health. Jakks’ Chief Executive acknowledged that the decision hurt his company’s performance during the previous quarter, but insisted it was the right thing to do. Other suppliers also are nervous about Kmart’s financial standing. In the Wall Street Journal article, an unnamed US toy manufacturer said that it will only sell to the chain if Kmart pays cash up front.

In the freight transportation industry core trucking companies often “fire” shipper customers by refusing to accept their loads. This happens when respective freight networks have become misaligned to a point where it is no longer profitable for the carrier to transport the shipper’s freight. Take, for example, the truckload market. In the spot market refusing loads is easily done by simply not responding to a load opportunity that does not meet the carrier’s objectives in terms of both direct costs and repositioning opportunities. In the contract market, however, carriers typically serve both profitable and unprofitable lanes. Stopping service to a contract customer is not viable during the contract period. However, carriers can simply refuse or not respond to certain requests even during the contract period (carriers are expected to respond to most – but not all – shippers’ transportation requests).

In some markets suppliers have become so powerful that they can pick and choose which companies they do business with. As I explain in my latest book The Power of Resilience (2015, MIT Press), in these markets the idea that “the customer is king” does not prevail. An example is the aerospace industry where the number of companies that supply spare parts for aircraft is limited, giving the incumbents a lot of leverage. For example, while British Airways has about 2% of the aviation market, Rolls Royce, its engine supplier, has 25% of the aircraft engine market.

In these types of situations some buyers respond by striving to become a “customers of choice.” Ensuring that your business consistently brings value to an important supplier can elevate you in the pecking order of buyers. This is especially useful when a key supplier’s capacity is constrained following a supply chain disruption, and they allocate available product according to the relative importance of their customers.

And suppliers are consolidating in almost every industry, mostly because of the cost pressures imposed by retailers and OEMs. Thus, CPG manufacturers are consolidating as a defense against the mega retailers, and automotive suppliers are consolidating so they can withstand the cost-cutting pressure from automotive companies. OEMs’ efforts to better manage their procurement operations by consolidating their purchases has also contributed to the creation of super-suppliers.

The pressure to consolidate is currently intense reports the Wall Street Journal. “The recent speed up in what has already been a strong year for mergers and acquisitions defies conventional wisdom,” said the Journal, pointing out that the increase in M&A deals is happening even though a Presidential election is imminent. “The fact that companies are inking mergers at a breakneck pace without knowing who the next president will be shows how strong the imperative to consolidate across industries is,” the Journal said.

In most markets this consolidation helps balance the negotiating power between OEMs and suppliers. In others, the shift could tilt the negotiating power towards large suppliers, and enable them to be more judicious about which customers they want to serve. Some might be tempted to pink-slip customers that aren’t delivering enough value, do not offer sufficient long-term potential, or represent an unacceptably high level of risk.

But before taking such drastic action, suppliers should be aware that there is a significant downside.

Customers, even ones that are undesirable, can be a valuable resource when the chips are down. In my book, I describe various situations where companies have gone out of their way to support suppliers during times of need. One of the prime examples is the upheavals caused by the 2008 financial meltdown, when many companies offered financial support to suppliers that were reeling from the crisis. For example, car maker BMW moved to help Edscha, a supplier of car roof modules, which declared bankruptcy in January 2009. One of the reasons why the OEM opted to provide support for Edscha was that finding an alternative vendor would have taken too long.

Another serious drawback of the customer firing strategy is that it can damage your market reputation. Suppliers that show a willingness to dismiss buyers can become known for not standing by customers, a reputation that can damage their ability to win new business and retain existing customers.

Suppliers should keep in mind that when things change, today’s reject customer could become tomorrow’s indispensable ally.