Businesses discover dangers of relying too heavily on a single client or industry

June 29, 2009

For decades, Indianapolis-based Indiana Supply Corp. successfully distributed Trane brand furnaces and air conditioners across Indiana. At its peak, the company had $40 million in annual sales, 105 employees and three warehouses.

Then, out of the blue in October 2006, a letter arrived from Trane's corporate headquarters in New Jersey. In 60 days, it warned, Trane would sever all ties with Indiana Supply. Instantly, a long-standing, symbiotic business relationship evaporated like so much sweat.

"They don't give you any reason," said Indiana Supply's former owner, Stan Hurt. "They just say 'You're canceled.'"

Hurt spent the next couple of years scrambling to recover. But in April, the economic downturn forced him to sell his company for a fraction of its former value.

In this deep recession, many local small-business owners suffer the same harsh dilemma. Heavily tied to a single supplier, customer or industry, they must diversify or die.

"I see it all too often," said Rhoda Israelov, executive in residence and career mentor for Butler University's College of Business. "A small business comes upon a [big] client or customer, gets eager or excited about the project or service, and keeps coming up with new ideas."

"Pretty soon, all the resources are going largely towards this one client," she continued. "Then, if something happens to that client ... in today's economy, it could wreck the small business."

Founded in 1955 by Hurt's father, Indiana Supply regularly won Trane's accolades and sales awards. In the end, it didn't matter. Trane bought back all its warehoused equipment from Indiana Supply.

But the largest share of the distributor's value derived from its relationships. Decades of hustle developing the Trane name with Hoosier heating, ventilating and air conditioning equipment dealers became worthless.

Indiana Supply met with other HVAC manufacturers and began distributing York brand products. But it was starting from scratch. Many of Indiana Supply's former dealer clients remained loyal to the Trane brand—and Trane had begun selling its equipment to them directly. Hurt knew it would take years to rebuild what had been lost.

So this spring he sold his small business to Pewaukee, Wis.-based Gustave A. Larson Co. Terms of the deal weren't disclosed. But Hurt said it had just 35 employees and about half its former revenue.

"This is the perfect storm situation, when you lose the Trane line and you have a major recession at the same time," Hurt said.

Edinburgh-based Banks Machine and Engineering Inc. has a similar predicament. Formed in 1999 as a spinoff of Indianapolis-based engineering firm Eagle Oxide Services, Banks Machine fabricates equipment used in battery-manufacturing plants. For years Eagle Oxide was its largest-indeed its only-customer.

"We had enough business and the orders were flowing continually," said Banks Machine General Manager Steve Halfaker. "We were happy, but that was shortterm thinking. We had to think beyond that, and that's what we're doing now."

Both Eagle Oxide and Banks Machine are heavily reliant on demand from the auto industry. Last year, new orders began slowing down. Then existing orders were canceled. Halfaker had long recognized that diversification was necessary, but the recession accelerated his timeline.

Banks Machine, which has 13 employees, hired its first outside sales representative. It also identified every manufacturing plant and food processor in a 150-mile radius and initiated a direct mail campaign. Halfaker recognized that Banks Machine could fabricate parts for any manufacturer, not just battery makers.

The trick is convincing new customers. The quest is going better than Halfaker expected. Banks Machine has already found one customer that makes rigs for oil exploration, and another that produces parts for conveyors in stone quarries.

"If you've got a primary customer, take a look at really what it is you're providing that customer. What things can you then take and sell to any customers that need those same type of services?" Halfaker said. "We tried to step back and say ... we're more than just a single piece or welding shop. We're a metal fabricator that can provide a complete package."

Others are having a tougher time translating their skills into new areas. Tiptonbased DC Coaters, for example, has been applying black "electracoat," or "e-coat," to auto parts since 1993. The epoxy paint protects metal parts from corrosion, greatly extending their useful life. Its 50 customers include all the major automakers and their supply chains.

But other industries don't use the same process. DC Coaters used to have 60 employees working two full-time shifts. Due to the recession, now it's down to 30, who work only one shift three days a week.

"What do you do? You're getting all the work that your customers can give you, but that's not enough to keep floating," said founder, co-owner and President Dennis Cook. "Usually we would have expected a 20-percent reduction in a recession. But we're looking at almost 50 percent. And for some parts, depending on what vehicle they go into, it's 100 percent."

A few years ago, DC Coaters invested several million dollars in new equipment that's now standing idle. Cook recently received a bridge loan from the U.S. Small Business Administration to keep his business afloat. DC Coaters is counting on an uptick in the economy to increase demand. And Cook hopes it happens soon.

"When we got into this, back in '93, automotive was on an upswing. Our best years were probably 2002-2003. We were really doing pretty well. We thought we'd selected the right thing," Cook said. "But when it goes down like this, you kind of question yourself whether you should have started it in the first place."

The first step toward client diversification is personal networking, said Israelov, the Butler career coach. Small-business owners regularly complain that they're too busy to "press the flesh" at industry events. She said that's a recipe for failure.

"You can never, ever be too busy to network," Israelov said. "That is your business. If you don't do that, you'll end up with 'big client syndrome.' Just like you wouldn't go without insurance, or back up your [electronic] data, you want to have 'big client insurance.'"

It's a delicate balancing act, because small businesses also can't afford to neglect their main customer. T.J. Moyer, president of McCordsville-based Moyer Technologies LLC, is learning how to juggle small new clients along with his larger first one.

Moyer's firm installs fiber-optic lines for telecommunications, such as telephone or security systems, across central Indiana. Founded in 2006, it has three employees. About 90 percent of its work has been for Indianapolis-based Lear and Associates LLC.

Moyer knows he needs to broaden his customer base. But he's wary of neglecting the date who brought him to the dance.

"As a new company, you've got to slowly build your portfolio with what your main client is giving you. It shows you've been able to keep a customer and make your company's name a little more reputable," Moyer said. "If you try to diversify too far and too thin, you're setting yourself up for failure."

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