There's a story doing the rounds in the US at the moment. Wal-Mart puts out a call for a supplier of detergent - the main requirements are that the packaging fits its six inch shelves and that it can be supplied within three days.

The multi-nationals are all contacted, as are several small suppliers for good measure. But when the bids come in, the big firms are nowhere to be seen. Only one small supplier, never contracted before, is able to meet all the demands. As a result it gets the gig and very soon Wal-Mart's shelves will be stocked with a detergent from a previously unknown company.

This kind of 'giant leapfrogging' could become more widespread. The flexibility and service levels of small suppliers invariably surpass those of the big manufacturers. Factor in the trend for locally sourced goods and the pressure on retailers to differentiate and the opportunities for small suppliers have never been better.

In the Wal-Mart example above speed of response is key. The big businesses weren't able to manoeuvre themselves quickly enough to meet the packaging and delivery time requirements, while the small supplier was. "It often comes down to private ownership versus plc status," says Nigel Wixcey, partner in consulting at Deloitte. "Family-owned businesses can respond more rapidly to demands because they have fewer decision makers, which means it takes less time to get to the 'doing' part of the job." Then there are the technological requirements retailers make of their suppliers. Big manufacturers are often slower to take up these developments than smaller suppliers that are keen to innovate and differentiate themselves. John Greaves, vice president, RFID Global Group, at NCR Corporation, says: "One stumbling block [for multi-nationals] is the apparent massive ramifications of fitting RFID into the packaging and IT set-up."

More than anything else, the flexibility and service levels of small manufacturers can put their larger peers to shame. You don't have to look at our industry to find examples of small businesses gaining large contracts. Histon Produce is a fruit and vegetable supplier to hospitals, local authorities and colleges around Cambridge with 31 staff and a turnover of £2.3m.

In a case study from a report by Nera Economic Consulting last year on the benefits of buying from small businesses, Histon customers all cite its "flexible, personalised service". For example, it often delivers product a customer forgot to order using a manager's car. MD Mark Channell says: "When you have six big customers, losing any of them would be disastrous, so we have quick response times and offer a personal service."

These traits are common to many small suppliers, according to the report. In some instances national suppliers don't even try to compete, particularly if the buyer is looking to cut costs. When the Cornwall Food Programme, buying for five NHS trusts, wanted to save cash while improving the quality of its ice cream supply, it requested bids from suppliers able to deliver superior taste, nutritional value, recyclable packaging and a slow rate of melting.

No national supplier chose to bid; instead the contract went to Callestick Farm, a local producer with only 12 staff. Since then not only has the quality of the Trust's ice cream improved, there are now opportunities for custom packaging and portion sizes.

However, the SME revolution also depends on consumers. Ed Hudson, fmcg sector leader at Ernst & Young, says: "The supermarket landscape in the UK is fairly saturated. Retailers need to make themselves more interesting and add value, and you do this by stocking products from the small firms. But the point is it always goes back to the consumer. Shoppers want innovative, local products - retailers need to meet that demand."

Innocent Drinks, for example, has grown in seven years from a staff of three and a turnover of nothing into a business with 93 people and a turnover of £37m, because the product was something consumers wanted. True, it was marketed well, but the creative thinking behind the brand is all too often missing from the big firms. At the CIES Food Summit in Paris last month every speaker from the global suppliers, including the CEOs at Kraft, Coca-Cola and Procter and Gamble, said improved innovation was key to their future growth.

Hudson has a warning for Innocent Drinks, though. "We've noticed that if a small supplier's share gets to 6-8% of its category in a market, then the larger established competitors will look to restrict further progress, either by buying them or copying them. The chilled fruit juice category provides an example here; Innocent Drinks has bought excitement and growth to this maturing category and in doing so has grabbed a 6% share. If they continue to grow as the same rate, the larger players may feel the need to respond." Consider Cadbury and its acquisition of Green & Black's, Unilever and Ben & Jerry's or L'Oreal and The Body Shop. Although being bought out may be a great reward for all the hard work put in, significant criticism has followed each of these deals as the green or ethical credentials of the acquiree were seen to be diluted.

Retailers are just as aware of the disadvantages of smaller suppliers as they are of their benefits. Asda's head

of local sourcing Karen Todd says: "Small producers don't have the resources, budgets, marketing or research capabilities to offer national supply, so it can require more resources to work with the higher number of suppliers needed to make up volume. Getting hold of the right person to talk to can be a problem, too."

However, she agrees that innovation and speedy, personal service invariably accompany small players and acknowledges how consumers are finding local products increasingly attractive. Indeed, all the major multiples except Morrisons have dedicated buying teams working with small and local producers, and the fact that big manufacturers feel the need to buy up small suppliers shows how much of a threat they are perceived to be.

The signs all point towards an increasingly open market for SMEs and once you're in, it's likely you'll stay in. "You have to mess up an awful lot to get delisted," says Hudson. Listings are never guaranteed and hard work is still the surest stepping stone to growth, but there's certainly never been a better time to be small.n

the benefits

Bringing in several small suppliers will bring greater competition to the market place, reducing costs from all suppliers.

SMEs have short management chains and approval routes, so can respond quickly to changing requirements.

Being a large customer of a small business means your business is crucial to the SME. This can result in a better level of service.

The SME may be more willing and able to tailor a product or service to meet a specific customer's needs.

Many SMEs supply higher quality specialist products or services than larger suppliers.

SMEs can bring innovation through, for example, the early exploitation of new technology or providing products or services in new or underdeveloped markets.

Source: Small Business Service