Specialization vs. Diversification: Considerations in Vendor Selection

Posted by Al Elger on Nov 21, 2011 9:26:00 AM

blank.pngFor companies that require tight-tolerance, critical-use plastic injection molding capabilities, it should be clear that it is critical to partner with a vendor that can consistently deliver quality products and value-added services to support these solutions. Do you want a vendor that is specialized or diversified?

A supplier may be specialized in one or both of two areas: customer and market. These are both subject to the 80-20 rule. Customer specialization refers to a vendor that has the majority of its business devoted to one or a small number of customers. That is, about 80 percent of a company’s business comes from just 20 percent of its customers. Market specialization is similar and on a broader scale, and suggests the majority of a company’s business comes from within one vertical market.

Both of these scenarios are subject to potential business pitfalls, from both the supplier and customer viewpoint.

Customer specialization is the equivalent to putting all your eggs into one basket. If a vendor loses a major customer, its entire business operation is at risk. Consequently, if you are a customer other than that major customer, you may risk losing a vendor that you have been counting on.

On the market side, a downturn in a specific industry jeopardizes both the vendor and its customers if they concentrate solely or primarily on that industry, even when the number of customers is diversified. An excellent recent example is the automotive industry, which experienced major struggles about three years ago and affected all auto manufacturers and their suppliers.

Conversely, customer and market diversification can be a significant benefit to both entities. Having a well-balanced customer base that includes expertise across different markets stabilizes all businesses involved from both the customer and vendor perspectives. It minimizes the peaks and valleys of the economy and associated swings. In the previous example of the automotive industry, Kaysun’s work in defense and healthcare verticals has flourished despite the auto industry’s struggles. And while the defense business is lessening somewhat, automotive is recovering and there is a positive overall balance.

Furthermore, there are lessons to be learned by dealing in multiple markets. At Kaysun, we have developed solutions in one market that have surfaced and been repurposed as effective solutions in a different market. This includes technology advances in complex injection molding, material selection and development, and applications, and encompasses the design and engineering expertise that goes into such projects.

Overall, utilizing a supplier with a well-balanced customer base and expertise across several industries provides the stability and diversification needed to provide intelligent solutions and consistent results that are consistently and reliably replicated.

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