- Major businesses/companies usually use well-established and standard procurement assessment systems that often come with various limitations.
- The payment process can also be quite intricate, sometimes resulting in final profits that are lower than initially expected.
- It is essential to evaluate one’s own financial gains and capabilities and proceed within the limit.
There is a famous Chinese phrase that holds true: “Don’t wear a hat that’s too big for your head.” The saying is presented subtly to remind people not to take on a form beyond one’s ability or worth.
For small and medium-sized enterprises (SMEs), if one day they were suddenly favored by a renowned/well established corporation and entrusted with a substantial order, how would you, as the owner, feel?
Certainly, you would be thrilled! You would perceive it as a heaven-sent opportunity, perhaps even seeing it as a chance that could lead the company to soar to greater heights.
Indeed, these prominent and established corporations boast excellent reputations and substantial purchasing power. Partnering with them could not only swiftly meet annual sales targets but also add an extra layer of prestige to the company’s profile.
However, it’s crucial to be mindful that your company could face rapid growth challenges and even potential failure without a clear assessment of your own capabilities.
Why is this the case?
We, 3S Adviser, have also participated in bidding for contracts with major corporations. Some business owners have shared their unfortunate experiences after securing these substantial orders.
Below are several factors that highlight potential hidden concerns within such large corporate orders. It is imperative for SMEs to take note of these aspects. Accepting such orders without conducting thorough investigations beforehand could lead to outcomes contrary to expectations, potentially disrupting business operations.
Concern 1: Low procurement with stringent limitations
It is essential to recognize that large corporations place considerable emphasis on cost-effectiveness in their procurement practices, often favoring lower pricing.
This practice stems from the fact that they typically operate comprehensive procurement evaluation systems. Their procurement specialists conduct extensive market price research beforehand, resulting in an intricate understanding of products, services, and their associated costs. Consequently, suppliers will find their profit margins constrained within a remarkably narrow range starting from the bidding phase.
Furthermore, these large corporations will usually have requirements regarding specific delivery timelines and service provisions.
Not to forget certain corporations capitalize on advantages such as procurement volume, company size, and reputation to further negotiate for lower prices. In addition to the pressure coming from other competing bidders, the eventual agreed-upon price frequently turns out to be very low.
We have personally encountered similar challenges. Even though the bid documents had already outlined a price that the client deemed acceptable, adhering to this price while executing the project proved to be a formidable task. It is likely that many experienced bidders can empathize deeply with this kind of scenario.
We have also heard from a business owner saying that “Sometimes, the earning is just a tiny bit but when unforeseen circumstances arise during the course and lead to additional expenses, even that small profit margin vanishes. The company’s image and turnover might seem promising, but when you look back into the details, there is not much profit left.”
Concern 2: No advance payment leads to cash flow challenges
Furthermore, the payment conditions set by large corporations can be highly stringent. Typically, these corporations do not include any prepayment clauses. Moreover, in order to ensure the quality of goods or services, they often establish terms where payment is only made after delivery, or even after the utilization of the provided products.
The entire process, from project initiation to final settlement, often spans several months. This highlights the vital importance for SMEs to have robust cash flow management. Such management is essential for covering various expenses, including upfront costs for materials and labor.
Taking all these aspects into account, if SMEs fail to diligently factor in various costs and instead accept seemingly attractive pricing, the outcome could very well be that the venture turns out to be unprofitable in reality.
Concern 3: Sacrificing one for another and jeopardizing loyal small clients
Furthermore, accepting significant orders from large corporations may inadvertently lead SMEs to sacrifice their existing loyal customer base. This stems from the inherent limitations of production capacity as smaller orders might be pushed down the priority list in order to ensure timely delivery of these larger orders.
Though these smaller clients might generate fewer orders individually, their loyalty and recurring business often match or even exceed that of larger corporations, even some have forged strong, enduring partnerships. Hence, when considering taking on substantial orders, SMEs must carefully assess whether their production capacity can handle the augmented workload.
Each substantial order unavoidably disrupts the production schedule for smaller ones. This often triggers conflicts between business liaisons and factory schedulers, who debate the order of precedence for different product batches.
From a production planning standpoint, adhering to all delivery dates is vital. Yet, considering the backdrop of constrained production capacity, fulfilling large orders without neglecting other shipments, while also considering workforce availability, material sourcing etc., becomes a complex puzzle to solve.
Wearing a Bigger Hat Than You Can Handle?
Focus on these 4 Key Factors for Success!
The concerns mentioned above are simply reminders. To excel in dealing with significant orders, SMEs are advised to carefully evaluate these 4 critical factors as below:
Taking into account the perspective of steady and sustainable business growth, it is essential to analyze whether a large order might impact your existing customer base.
Clearly define your profit objectives. Calculate meticulously the potential profitability of the order, rather than being solely enticed by the order’s volume.
Consider the potential financial implications of a large order; maintaining a strong financial standing is vital.
Accept orders that align with your actual capacity, and avoid taking on more than you can handle.
The second factor is particularly important. We once encountered a scenario where an SME had nearly 70% of its clients as large corporations. Consequently, their profits consistently remained at remarkably low margin, and some orders even resulted in losses. While profit goals were set, adhering to these goals proved to be a challenge.
After in-depth discussions, we developed a range of cost-effective supplementary services, along with adjustments to the employee commission structure. We worked hard to negotiate these changes with the clients and ultimately succeeded in safeguarding the intended profit goals.
Through this process, the proprietors also came to realize that these clients were genuinely satisfied with the proposed prices and services. Previously, their willingness to lower prices was driven by persistent concerns about winning bids and securing orders.
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