Supply-Chain Squeeze

Big clients demand cost cuts--now

The ultimatum came in January: Cut your prices 30%, said Robert Giampia Sr.'s biggest customer, or the deal is off. But with margins already razor-thin, another cut was impossible. So Giampia, the owner of Circuit Techniques Inc., a Yonkers (N.Y.) maker of fuse-box components, called his attorney and banker and began to discuss his options--including bankruptcy, which he has so far rejected.

Giampia's problem? His customer sells in turn to a large discount retailer, whom he declines to name for fear of reprisals. With the mega-merchant pressing for ever-lower prices, the pain gets passed down to Giampia. Last year, his 75-person company lost $500,000. "For the first time, I couldn't pay my bills," he says.

It's the supply-chain squeeze. Throughout the 1990s, large companies cut costs by reducing their number of contractors and leaning hard on those who remained. It was tough, but as long as sales were expanding, entrepreneurs were able to cope. In a slowing economy, however, cost-cutting has become a priority for everyone; witness DaimlerChrysler's (DCX ) recent demand that its parts suppliers accept a 5% cut. "There will be very little pricing power in almost every industry," notes Steven Cochrane, senior economist at Inc. The only long-term solution is to craft a new business model, says Edward J. Marien, a logistics professor at the University of Wisconsin, Madison. The edge goes to those that innovate, or serve a specialized market.

Tamotsu, a New York fashion-design company with 26 employees, knows about niches. Much of the company's $20 million in sales come from its line of high-end plus-size fashions. Because it was one of the first in that market, Tamotsu enjoys considerable leverage with clients, says sales manager Ellen Mullman. Not so with its misses size line. Last year, a department-store chain agreed to carry that line in seven locations. Instead of being the one to call the shots, Tamotsu suddenly found itself with hundreds of competitors, and no leverage. The chain was able to demand all sorts of concessions--even extra fees for hangers. The client, says Mullman, "doesn't care. If you go under, they'll just get another vendor." After losing $750,000 in six months, Tamotsu called it quits with that retailer.

Superior service is also a niche, of sorts. Stamford (Conn.)'s First Service Networks coordinates maintenance and repairs for national retail chains such as Williams-Sonoma Inc. (WSM ) The company, which has about 100 employees, recently invested $10 million in a wireless intranet to keep managers apprised of the status of repair jobs. Even in the midst of slowdown, clients "are looking for a smooth system, more than price breaks," says Chief Executive James T. deGraffenreid. The moral? Keep innovating, and instead of being yanked by the supply chain, you'll become an indispensable link.

By Stephanie B. Goldberg

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