For those who may not know, I own a business and our field is HVAC distribution, which is a subset of industrial distribution.
A few weeks ago I lost my largest customer. It wasn’t due to any fault of my company or staff. The order came from one of my manufacturer vendors, where the people and culture have developed into a gross toxic stew over the last few years. I’ll spare you the gory details, but to quote Goodfellas, “we had to sit still and take it. It was among the Italians, it was real greaseball shit“.
Which is to say, one of my largest vendors gave this order and no matter how hard I fought, or wanted to fight, it was over. So that was that.
The great part about owning your own business is that over time (I’ve been doing this for 35 years) you develop a sense of peace in the face of threats and you develop what many have called “steel”. I have faced unimaginable (to most) adversity being in business for this long. We have lost our largest customer before.
And while this is a short term shock to us, we have been here before and have been through worse. Kneejerk reactions always prove unproductive. Sitting in a quiet room and thinking about your company, where you are, and who your friends are and what you can do IS productive. Charlie Munger said:
The first rule of a happy life is low expectations. If you have unrealistic expectations you’re going to be miserable your whole life. You want to have reasonable expectations and take life’s results, good and bad, as they happen with a certain amount of stoicism.
Munger thinks that I shouldn’t spend too much time navel gazing over something that I had no control over. So what now? This customer was 12% of our revenue.
Well, after thinking about it, this is what we are going to do.
There is a very good possibility after this blows over that the new vendor(s) for this customer will screw the pooch and the customer will eventually go to the vendor and say “we want the Dan from Madison company back or we will drop you”. Keep good relations with the customer.
But if that doesn’t happen, what can we do to improve profitability? I remember someone saying a long time ago that they increased profitability by decreasing their revenue. Let’s use the new time we have on our hands to look at our processes and vendors and maybe drop customers who are actually costing us money to do business with. Are we missing some rebates? Are we paying the correct amount for credit card processing? And on and on.
There’s another vendor for the same types of products who is much smaller that has been courting me for some time. As I’m furious at the other vendor, let’s look for places we can sub this new vendor’s products. They are being super nice to me and treating me like a customer instead of like the enemy like the bigger, toxic company. The other vendor’s culture in stark contrast is all positive and energetic. How refreshing!
And so forth. This is a simple example but life is full of hard times and rough patches. That Munger quote applies to everyone.
“Sitting in a quiet room and thinking about your company, where you are, and who your friends are and what you can do IS productive.”
That, right there.
It’s great that you are keeping a positive attitude, Dan from M. Would you mind sharing a little more of the background for anyone like me who is slow on the uptake?
It sounds like vendor V sells you components which you build into systems which you then sell to customers C; it is not clear if Cs are end users or are installers of your systems. Vendor V has prohibited you from selling any of your systems containing their components to customer C1, who represents about one eighth of your revenues (and maybe more of your profit?). Presumably vendor V is trying to make customer C1 buy systems similar to yours from one of your competitors (or from V itself). Is that the picture?
If vendor V can do this with one of your customers, then presumably V could do this will ALL of your customers. Definitely time to look for alternative vendor V1 and maintain good relations with customers C1 to Cn, as you plan to do.
If vendor V is thoroughly messed up (DIE’d?), but still capable of manufacturing good components which you trust, maybe it is time to begin to organize resources so that at some point in the future when V sinks deeper into problems you could buy out from V the facilities which make those components — upstream integration, they call it.
Customer sounds like a large and very dysfunctional company–what are they? A lower-tier distributor? An HVAC installer? An OEM? Some combination of these things?
@David – a very large OEM
@Gavin – Its a really, really long story and would get super boring. The shortest version possible is that this OEM is doing all kinds of crazy things in the market and they are becoming more toxic by the day. My story is just one of many. It is going to cost them share for sure. We will make this up and then some.
As somebody said; “Living well is the best revenge.” Turns out it’s one of those things that nobody knows just who:
https://quoteinvestigator.com/2018/09/02/living-well/
The ability to grit your teeth and just go on with something productive is a greatly underrated skill that probably isn’t taught in business schools.
Balancing revenue with profit is one of those things that seems so easy from the outside, simply drop anything that is low profit. If you look at the news, you’ll have seen many statements from CEO’s about jettisoning “non-core” business with no few being so successful as to whittle the core down to invisibility.
Dan: “The shortest version possible is that this OEM is doing all kinds of crazy things in the market and they are becoming more toxic by the day.”
Sounds like the familiar story of a management team focusing on the Quarterly Returns they report to the stock market in order to maximize their current share price (i.e. their stock options) while letting the business slide. See (eg) Boeing.
Consider yourself to be in a privileged information situation. You have advance knowledge that the OEM is going downhill — and will likely at some point start divesting assets; assets which might be quite valuable in the hands of a competent business manager such as yourself. Hang in there!
Best wishes, Dan. Your innovation and adoption of creative changes to you business during and after Covid clearly point to you overcoming this setback. Keep us posted.
Death6
Wonder if their person in charge learned at the same place the Bud Lite executive(former) learned at.
The CV may learn soonly that their customer is YOU and your HVAC firm. Not the end user who apparently wants their product routed through some other firm, but not yours.
It may prove long term a better choice to start to investigate other sources of product and start to offer their line as an alternative or even replacement. Essentially that is 1/8th of your business that more or less was lifted off your plate. Their choice, but it seems they have ignored their real customer and along the line may end up paying the price.
In short, it is not the end of the world, and perhaps you were given a cheap lesson that those who sell product for you to warehouse, distribute, and perhaps install(?) will not always treat their customers(you included) in their(both) best interest, potentially in search of higher stock price. An ephemeral target at best. I can think of multiple companies that chased the market, trying to boost their stock, and forgetting who their actual customers were. They lost sight of their product and who buys it. And likely why they bought it.
If they have lost that, it might be time to search for a product line where the manufacturer realizes who the actual customer is. And, it is not Wall St and a passel of ‘market specialists’ who do not actually make anything, and wouldn’t know a TXV from a OT. Their ‘whim’ of projected quarterly anythings, if paid attention to, can lead some astray from their actual important things they should really pay attention to. Customers.
IMO.
@tommmy – you have hit the nail on the head. We will be fine. This vendor won’t.
Hey Dan – Happy coming 2025!
I’ve no experience with how manufacturing/ distribution system works in HVAC industry – only familiar with furniture dealerships – and I believe it’s a whole different game, probably unique enough that other markets will think we are all crazy.
Still, as a specifier I can’t imagine a manufacturer (comparatively speaking, a mid-market size…say…,a href=’https://www.geigerfurniture.com/”>Geiger Contract will dictate their dealer to stop selling to my client (thru me), for whatever non-financial reason. Usually they run themselves backwards even for smallish orders if the client (customer) has potential for a bigger order.
The only legitimate reason, in my experience, could be if the client proved particularly difficult on collection of payment…or litigious in the extreme.
In any case – I’m sure in your ability to reflect, re-organize and repurpose.
Wishing you a quiet and profitable year.
Thanks for the kind words Tatyana. This situation is admittedly complex and I probably didn’t convey that well enough in my original post. In the end it was a garbage decision by the manufacturer and I have had a pretty productive week already working on our future plans.
A couple of acquaintances got an agency agreement with a manufacturer and went to a lot of work to set up dealers all over the country, to the point that they were selling as much as they could produce. At this point, the manufacturer decided to cut out the middle man sell direct to these dealers.
The last I heard, my guys had four big warehouses scattered over DFW based on about a 20% production cost advantage and a virtually unlimited production capacity. They started with the dealers they had already set up because it was their relationship.