The critical need to describe the risks for your suppliers in a business plan


In an earlier blog, I described each line item that the business plan needs to discuss to complete a well drafted strategic plan. Each line item is extremely important. Some need to be explained further. One of those line items is the “suppliers” topic. The key issue here is that a supplier can have a severe impact on any kind of business – whether the final delivery of the product or problems arising from the supply chain. A business plan must take into account any potential problem or risk. And many plans seem to forget to analyze and determine the risks regarding “suppliers.”
In one start-up, I had to manage the construction of a data storage device. Besides the software which was being developed in house, the storage device required at least 30 hardware parts. I reviewed and studied each part and prioritized which parts were unique and/or expensive. Most were off the shelf and were easily fungible. On the top of that risk list was a flash drive component. The drive was manufactured in a small shop in Los Angeles, and was a unique and a critical component of the data storage system. I decided to visit the manufacturing facility and see what were the risks involved for the manufacturing of the flash drive.
After I reviewed the facility, I noticed that the factory did not manufacture the product with a standard assembly line. I started to evaluate the risks during my visit. It was a small shop owned by a single individual with 20 or so employees who assembled the flash drives. Since the facility was located in the U.S., there was no international risk. My big question was whether it was capable of upscaling the manufacturing facility by increasing the units once sales took off. After my visit, we entered into an agreement to establish minimum manufacturing requirements with a reduction on the pricing dependent on volume. Therefore, I acknowledged the company’s risks with this important supplier and I attempted to mitigate those risks through a volume manufacturing agreement. I also looked at other potential sources in case this small company failed… it had one owner who was also the manager of the company. That risk was fairly obvious and concerned me. Many large companies are reluctant to work with small suppliers owned by small, independent managers without succession management. This risk is fairly well known to large companies attempting to work with small, family owned enterprises.
That is why it is important to review your “suppliers.” Consider the worst case scenarios. Like a chess player, anticipate what could happen and develop a plan to circumvent the problem. Manufacturers from cars to copying machines all manage their risks and control the supply chain.
Are software developers exposed to suppliers as well? As I stated earlier, every company has suppliers of one sort of another. But virtually all of the smaller software companies ignore the supplier risks at their peril. One software development team located in Los Angeles had put together an application for a Samsung tablet relying on the Android system. It was ready test the Beta. Except the company had one problem: Apple had filed a patent lawsuit against Samsung and Apple prevailed. Now the tablet supplier could not support the software company without suffering substantial legal penalties. Did the company evaluate its supplier risks before hand and thought of alternate suppliers? No. Now, with limited resources remaining, it had to think of incorporating the software for alternate tablets. Meanwhile, time and money were running out.
Suppliers can be a Cloud platform, a data center, a sprocket – anything that becomes part of the supply chain to develop the product. By evaluating the suppliers, one can take counter-measures for the risks in the event the specific supplier cannot deliver a component or service. To draft an effective business plan, one has to analyze the risks of its suppliers within a well drafted business plan.

Advertisements

About Juan Ramón Zarco, SVVGP 胡安•雷蒙•扎尔科

Juan Ramon Zarco, 胡安•雷蒙•扎尔科, Silicon Valley Ventures Growth Partners llp, Hygieia Healthcare Technologies Company, AllRest Technologies LLC, Crimson Growth Partners LLP, jrzarco2001@yahoo.com, is an experienced as CxO, General Counsel and Secretary to public and private companies with global operations. Established track record of producing practical, revenue-focused solutions. As Counselor and Secretary, demonstrating vision, integrity, and sound business judgment, to CxOs. Managed complex, strategic transactions, M&A, contracts support, PE Financing, IPO, SEC compliance, Corporate/HR governance, IP licensing, Budgeting, Staff, outside counsel management, International market access strategies, Domestic & foreign government relations and advocacy. Creative in designing and implementing market access strategies. Practices law beyond conventional model with low-overhead and project-based fees. Effective at managing departments, formulating marketing strategies, balancing budgets, and implementing cost-saving measures. Extensive in-house and private practice experience, advising clients on commercial, corporate, international business, and technology law and policy. http://www.docstoc.com/video/89135472/make-your-business-an-international-presence; http://www.youtube.com/watch?v=fx5gijf3yoc For Sprint, he managed iDen international development in Southeast Asia, Middle East, and Africa, and contractual issues with Verizon. In Private Equity, he worked with Pegasus in vetting international investment deals and interim President for portfolio companies, such as Data Foundation, a data storage company, handling marketing, strategy, fund raising, and accounting. Before Pegasus, Mr. Zarco, as CLO and V.P. of Corporate Development, played a principal role in the structuring, international expansions for 2 telecom companies, U.S. Cable Group and Viatel, Inc. in financing and M&A deals exceeding $200 million. Mr. Zarco earned a J.D. from NYU Law School, M.B.A. from Cornell, and B.A. from Williams College; is fluent in Spanish, Portuguese, French, and German, with working knowledge of Russian, Arabic and Japanese.
This entry was posted in Capital and Management, Entrepreneurship, Management and Capital, Strategy and tagged , , , , . Bookmark the permalink.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s