Suppliers Who Hold the Table Hostage

Business is like the game of Poker

Imagine playing poker in a private room where one man owns the only deck of cards. He does not sit in the game or play a single hand. But before the first pot he names his price for the use of the deck — and halfway through the night, with everyone’s money on the table, he names a higher one. You can pay it or go home. That man is not a player. He is something more powerful, and every business that has ever depended on a single supplier knows exactly who he is. When one supplier controls what you cannot do without, he does not compete with you. He taxes you — and he sets the rate himself.

The hostage situation always begins reasonably. A supplier offers the part or channel that makes your product possible, at a price that works, and in the early days he is a partner in your success. The trouble is built into the arithmetic of dependence. The more your business grows around his input, the costlier it becomes to leave him — your designs assume his component, your customers expect his ingredient, your contracts promise delivery dates his trucks make possible. Each year of the relationship raises the cost of ending it, which is to say each year raises the price he can charge. He only has to be rational: he knows what switching would cost you, and he prices just beneath it.

The forms are endless. The manufacturer whose machine runs on one company’s patented part discovers at renewal that the part has become the most profitable thing he sells — to his supplier. The restaurant built around a single purveyor of a signature ingredient finds, when the purveyor is bought out, that the ingredient arrives with a contract attached. The retailer who sells through one dominant platform learns that the platform is both his landlord and his competitor, free to raise the commission and sell its own version of his best product beside his. In development, my own trade, I watched it happen with the plainest materials: in a small desert town there may be one concrete plant within economical hauling distance, and when that plant knew a big pour was scheduled and the builder had no alternative in wet-concrete range, the price of a yard had a way of reflecting the situation.

The hostage-taker’s tax is not always money. Sometimes it is paid in priority: your orders wait behind his larger customers in a shortage, and you learn your true rank the week you can least afford it. Sometimes it is paid in information: the sole supplier sees your volumes and plans, and if he ever competes with you — or sells to the man who does — he starts knowing your business from the inside. And sometimes it is paid in survival: a supplier who fails or discontinues your input can end a healthy business through no fault of its own. Dependence converts his risks into yours.

There are defenses, and they share one quality: they are all cheaper before you need them. The second source is the classic one — qualifying another supplier while the first is still friendly, even at slightly worse prices, because the premium is not for the part; it is for the door it keeps open. A contract with a priced formula beats the handshake that renews at whatever you will bear. Stockpiling the critical input, redesigning to accept substitutes, and in the extreme case building the supply yourself are all the same move: reducing the price of saying no. A negotiator who cannot walk away is not negotiating. He is being read a price list.

Underneath it all sits a question to ask yearly, in writing, supplier by supplier: if this man doubled his price or vanished tomorrow, what happens to my business, and how long do I last? If the answer is a bad quarter, he is a vendor. If the business stops, he is a partner you never agreed to take — and the next year’s work is to change that answer while the relationship is still pleasant enough to change it in.

Here is the takeaway. Make the list of inputs you cannot do without — the part, the platform, the plant — and mark every one from a single source. For each, buy your insurance while you are still a customer instead of a hostage: a second source, a formula contract, a reserve on the shelf, or a redesign that frees you. You will pay for that freedom, and it will look unnecessary in every good year. It is the cheapest money in this book. At the table where one man owns the deck, the only winning move is to own a second deck — before he raises the price of the first.

Business is like the game of Poker

Imagine playing poker in a private room where one man owns the only deck of cards. He does not sit in the game or play a single hand. But before the first pot he names his price for the use of the deck — and halfway through the night, with everyone’s money on the table, he names a higher one. You can pay it or go home. That man is not a player. He is something more powerful, and every business that has ever depended on a single supplier knows exactly who he is. When one supplier controls what you cannot do without, he does not compete with you. He taxes you — and he sets the rate himself.

The hostage situation always begins reasonably. A supplier offers the part or channel that makes your product possible, at a price that works, and in the early days he is a partner in your success. The trouble is built into the arithmetic of dependence. The more your business grows around his input, the costlier it becomes to leave him — your designs assume his component, your customers expect his ingredient, your contracts promise delivery dates his trucks make possible. Each year of the relationship raises the cost of ending it, which is to say each year raises the price he can charge. He only has to be rational: he knows what switching would cost you, and he prices just beneath it.

The forms are endless. The manufacturer whose machine runs on one company’s patented part discovers at renewal that the part has become the most profitable thing he sells — to his supplier. The restaurant built around a single purveyor of a signature ingredient finds, when the purveyor is bought out, that the ingredient arrives with a contract attached. The retailer who sells through one dominant platform learns that the platform is both his landlord and his competitor, free to raise the commission and sell its own version of his best product beside his. In development, my own trade, I watched it happen with the plainest materials: in a small desert town there may be one concrete plant within economical hauling distance, and when that plant knew a big pour was scheduled and the builder had no alternative in wet-concrete range, the price of a yard had a way of reflecting the situation.

The hostage-taker’s tax is not always money. Sometimes it is paid in priority: your orders wait behind his larger customers in a shortage, and you learn your true rank the week you can least afford it. Sometimes it is paid in information: the sole supplier sees your volumes and plans, and if he ever competes with you — or sells to the man who does — he starts knowing your business from the inside. And sometimes it is paid in survival: a supplier who fails or discontinues your input can end a healthy business through no fault of its own. Dependence converts his risks into yours.

There are defenses, and they share one quality: they are all cheaper before you need them. The second source is the classic one — qualifying another supplier while the first is still friendly, even at slightly worse prices, because the premium is not for the part; it is for the door it keeps open. A contract with a priced formula beats the handshake that renews at whatever you will bear. Stockpiling the critical input, redesigning to accept substitutes, and in the extreme case building the supply yourself are all the same move: reducing the price of saying no. A negotiator who cannot walk away is not negotiating. He is being read a price list.

Underneath it all sits a question to ask yearly, in writing, supplier by supplier: if this man doubled his price or vanished tomorrow, what happens to my business, and how long do I last? If the answer is a bad quarter, he is a vendor. If the business stops, he is a partner you never agreed to take — and the next year’s work is to change that answer while the relationship is still pleasant enough to change it in.

Here is the takeaway. Make the list of inputs you cannot do without — the part, the platform, the plant — and mark every one from a single source. For each, buy your insurance while you are still a customer instead of a hostage: a second source, a formula contract, a reserve on the shelf, or a redesign that frees you. You will pay for that freedom, and it will look unnecessary in every good year. It is the cheapest money in this book. At the table where one man owns the deck, the only winning move is to own a second deck — before he raises the price of the first.

Business is like the game of Poker

Imagine playing poker in a private room where one man owns the only deck of cards. He does not sit in the game or play a single hand. But before the first pot he names his price for the use of the deck — and halfway through the night, with everyone’s money on the table, he names a higher one. You can pay it or go home. That man is not a player. He is something more powerful, and every business that has ever depended on a single supplier knows exactly who he is. When one supplier controls what you cannot do without, he does not compete with you. He taxes you — and he sets the rate himself.

The hostage situation always begins reasonably. A supplier offers the part or channel that makes your product possible, at a price that works, and in the early days he is a partner in your success. The trouble is built into the arithmetic of dependence. The more your business grows around his input, the costlier it becomes to leave him — your designs assume his component, your customers expect his ingredient, your contracts promise delivery dates his trucks make possible. Each year of the relationship raises the cost of ending it, which is to say each year raises the price he can charge. He only has to be rational: he knows what switching would cost you, and he prices just beneath it.

The forms are endless. The manufacturer whose machine runs on one company’s patented part discovers at renewal that the part has become the most profitable thing he sells — to his supplier. The restaurant built around a single purveyor of a signature ingredient finds, when the purveyor is bought out, that the ingredient arrives with a contract attached. The retailer who sells through one dominant platform learns that the platform is both his landlord and his competitor, free to raise the commission and sell its own version of his best product beside his. In development, my own trade, I watched it happen with the plainest materials: in a small desert town there may be one concrete plant within economical hauling distance, and when that plant knew a big pour was scheduled and the builder had no alternative in wet-concrete range, the price of a yard had a way of reflecting the situation.

The hostage-taker’s tax is not always money. Sometimes it is paid in priority: your orders wait behind his larger customers in a shortage, and you learn your true rank the week you can least afford it. Sometimes it is paid in information: the sole supplier sees your volumes and plans, and if he ever competes with you — or sells to the man who does — he starts knowing your business from the inside. And sometimes it is paid in survival: a supplier who fails or discontinues your input can end a healthy business through no fault of its own. Dependence converts his risks into yours.

There are defenses, and they share one quality: they are all cheaper before you need them. The second source is the classic one — qualifying another supplier while the first is still friendly, even at slightly worse prices, because the premium is not for the part; it is for the door it keeps open. A contract with a priced formula beats the handshake that renews at whatever you will bear. Stockpiling the critical input, redesigning to accept substitutes, and in the extreme case building the supply yourself are all the same move: reducing the price of saying no. A negotiator who cannot walk away is not negotiating. He is being read a price list.

Underneath it all sits a question to ask yearly, in writing, supplier by supplier: if this man doubled his price or vanished tomorrow, what happens to my business, and how long do I last? If the answer is a bad quarter, he is a vendor. If the business stops, he is a partner you never agreed to take — and the next year’s work is to change that answer while the relationship is still pleasant enough to change it in.

Here is the takeaway. Make the list of inputs you cannot do without — the part, the platform, the plant — and mark every one from a single source. For each, buy your insurance while you are still a customer instead of a hostage: a second source, a formula contract, a reserve on the shelf, or a redesign that frees you. You will pay for that freedom, and it will look unnecessary in every good year. It is the cheapest money in this book. At the table where one man owns the deck, the only winning move is to own a second deck — before he raises the price of the first.

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