There are a lot of business lessons we can all learn from the Dairy Industry in NZ right now. The effect of supply and demand on prices, and knowing that your customers are not only the middle men in the supply chain.
Know your market and customers
I suspect too many dairy farmers saw their market as just Fonterra, when in reality it was Fonterra and every other dairy distributor and producer in the world. Had farmers recognised their market was being flooded with more competition and more supply from existing farmers (which has been happening over a number of years now) they would have been better prepared for the excess supply and reducing prices we now have.
When prices are good (so profits are good), greed can motivate existing business owners to expand and sell more. Likewise the buoyant market attracts new competition also looking to produce & sell product. Naturally the supply to market increases.
What a customer is willing to pay is based upon the level of supply relative to the level of demand. Too much supply and too little demand will see prices drop, the effect is a decrease in profits to the farmers. Too little supply and too much demand will see prices go up and an increase in profits to farmers.
As a business owner, you need to understand your market and who your true customers are. In the case of many primary industry products this also means understanding what the trend is in terms of end use of your products. While you can’t directly control what your customers do, it pays to understand them to improve your chances of getting paid. It also assists in knowing when to get out or to change what you do if demand is disappearing or the market is being flooded by excess supply.
Never abdicate the responsibility of managing your market to others completely. Even if they are given that responsibility, it’s your business/livelihood on the line if they stuff things up with your end customers. The role of a middle-man and their customers can greatly impact your business.
Don’t know or understand your customers/markets? We can help you find yours.
This is part two of a four part series of Business Lessons we can all learn from the Dairy Industry. Next we discuss how the role of a middle-man works and as a business owner, the lessons you can learn.