Choosing a Supplier- small businesses, rely on sourcing products and services from a range of different suppliers, to deliver a business service to their customers. Choosing a reliable supplier is an essential management decision, and may impact future profitability. For small business start-ups, choosing which suppliers to use to provide raw materials, products for resale, provision of utilities, office supplies, or critical IT support services, can be a bit of a challenge. The supplier evaluation process itself can be time-consuming, (and with all of the various special offers), may feel like 'comparing apples with oranges'. Consequently, many managers do not spend enough time evaluating which supplies to deal with, and which ones to avoid.
For smaller owners of business start-ups, it is often the case of choosing suppliers based on historical familiarity or a personal recommendation by a trusted friend or colleague. However, an over reliance on any one supplier, or one who subsequently fails to deliver, may end up crippling your enterprise. There are many examples where small firms have relied on larger trade suppliers to source products on trade credit, only to find the supplier has unexpectedly changed their trading terms, adjusted their minimum order level, changed their product lead times, or even gone into company administration. Therefore, a sensible first step is to separate the sourcing of goods and services into critical and non-critical categories. For instance, office supplies can be purchased from a range of popular and well-known retail outlets, both in the high street or online. Office suppliers would represent a non-critical supplier category. Once this fairly straightforward list has been created, a sensible matrix could be created to evaluate each critical supplier, based on the following issues and criteria:-
- Customer Service Levels - as a small business you will need to provide excellent customer service, and as such require the same from your trade suppliers. Does the supplier have a dedicated telephone number or call centre helpdesk or team, ready to answer any queries you may have? What hours is their call centre open? How quickly will the supplier reply with answers to day to day queries?
- Trading Payment Terms - how much time will your potential trade supplier give you to pay invoices for goods or services delivered? What are the consequences of a late payment in their standard contractual terms and conditions? Are there any clauses in their trading terms regarding compensation for defective products, returns or penalties for late deliveries?
- Product or Service Quality - what formal accreditations does the supplier have related to quality standards? Have they achieved any awards for operational efficiency and service delivery, from their industry association? Is there any bad press regarding this company's ability to deliver goods or services on the internet? Check online forums for any reports of poor service delivery. Can the proposed supplier provide any case studies or reference sites where you can actually speak to existing clients to understand how reliable the supplier is?
- Staffing Levels and Experience - how many people do they employ and how experienced are they? A reliance on a smaller trade supplier may create service delivery problems, if staff unexpectedly leaves then that trade supplier or it gets into financial difficulties. Likewise, when dealing with a huge trade supplier, will they provide an adequately trained member of staff and a personalised service? sometimes dealing with a smaller trade supplier means a better quality of service, (as your custom is relatively more important to them).
- Geographical Spread and Flexibility - don't be dazzled by a pretty looking website. Sometimes its easy to mistakenly believe organisations are bigger than they actually are, based on a cursory glance at their website. Take the time to find out exactly where the company is physically based, who owns it, where they are based, what their turnover is, and how long have they been in business. Are they close enough to your business to make face to face meetings viable? (to discuss delivery times, service delivery contractual terms and quality standards).
- Long Term Financial Viability - is your prospective trade supplier has limited liability status, check on companies house to understand what level of liabilities your potential trade supplier is exposed to, if any. Although the company reports maybe slightly out of date, a company report provides a better understanding of their financial viability and hence long-term reliability.
Contract Tendering Process - at the start of any relationship with trade suppliers, it is important that you undertake due diligence as part of any Invitation to Tender. An Invitation to Tender is a process whereby one business invites a selection of prospective suppliers to provide a price and information about how they (their business) will provide goods and / or services, to the prospective customer. Typically, the Invitation to Tender document would include the following sections:-
-
The length of prospective contract;
-
The products and services required;
-
The quality of products and services expected;
-
Service levels that the prospective supplier will need to adhere to ;
-
A draft contract or terms of reference that will be in placed;
-
The quantities of goods or services required;
-
The timescale that the prospective supplier will have to meet in implementation;
-
Ongoing support and account management functions expected of the prospective supplier;
-
A request to see the Suppliers last set of audited accounts;
-
Request for permission to site visit the prospective supplier should this be necessary;
-
Due diligence questions regarding how the prospective supplier manages their own suppliers and third parties;
-
Request for references should they be required of current customers that the Suppliers have;
Before the Invitation to Tender is issued, a confidentiality agreement is usually signed by all parties in advance, to enable open and honest communication during the Tender process. Once the Tender Responses are received back by the Customer, the Customer should keep the prospective Suppliers updated as much as possible. It is usual that further information be requested by both parties as the Tender process progresses. In short listing prospective Suppliers, the Customer should use a matrix to score each Supplier. This way each Supplier has assessed as to their ability to meet the imperative requirements, and in turn how well they could meet these requirements. By giving a weighting to each element, i.e. service levels, and then a score given to each Supplier, the Customer should be able to have a final score by which to short list the most favourable Suppliers.
Managing a Supplier Relationship - it is important to have a good understanding of your trade suppliers situation and needs, to minimise the risk of instability and nasty surprises. Larger ones may allocate named account manager you to build a personal relationship with. By sharing information and establishing a day-to-day working relationship with the account manager, trade supplies can be better maintained. never assume your supply fully understands your internal business workings and priorities. By undergoing joint planning regarding stock levels, peaks and troughs throughout the year, financial concerns and quality issues, trust is improved on both sides. The more the supplier knows about your business, and you about bears, the more likely you are to receive favourable trading discounts or concessions. They have better confidence in the likelihood of receiving repeat orders in the future, and on what basis and are hence better equipped to make decisions regarding your account. Be sure you understand how their credit control function operates so that you understand who is in charge of chasing payments from you, the information required and the impact on your cash flow.
Using Bulk Buying Groups - in the light of global recessionary pressures, small firms everywhere were trying to reduce their overheads, in order to improve their gross margins. However, wholesalers only want to provide discounts for larger bulk volume purchases. They are less willing to do this for individual smaller orders from small firms. By using a buying group, who can afford to purchase in bulk, discounts can be achieved for smaller businesses. Buying groups also achieve better payment and delivery terms, which are an essential element of cash flow management and stock control. For smaller firms with less purchasing power, (compare to retailers that are part of a larger chain or network), joining a buying group provides a simple and effective solution. By clubbing together to make bulk purchases, members of the buying group have a greater purchasing power and can therefore achieve bigger discounts for its members. In America buying groups are sometimes called purchasing alliances. Buying groups purchasing power helps to reduce the inequalities smaller firms face when trying to compete with larger competitors in their market. In particular by guaranteeing extended or better trade credit terms, than individual wholesalers, suppliers cash outflow is improved. This is particularly important in poorer economic conditions where larger wholesalers are increasingly exploiting smaller suppliers to improve their own cash flow position.
Buying groups tend not to be of a general nature but instead tend to organise themselves around specific sectors of the economy, where its members are seeking to purchase very similar or identical bought goods, materials and products. This makes the administration and negotiation simpler and more effective. Buying groups can be formed using different models which dictate which members achieve what level of discount. A democratic model involves sharing the cost savings equally across all of its members. Other buying groups are controlled by a board or a small number of individuals who make strategic decisions about investment decisions, which the majority of the rest of the group must accept. The majority of buying groups simply break even and are set up to save money and not to make it, while keeping a nominal sum to facilitate the administration and the deployment of centralised key staff.
The other benefit of joining a buying group is the that its members can either meet up on a regular basis, or access the buying group's online forum, blogs, newsletter and so on. This enables members to keep up with the late industry news, exchange ideas and information, as well as offer specialist services, and resell over stocked products to each other. Buying groups can sometimes also brand their own product lines, as well as provide specialist advice to its members. This enhances the branding and professionalism of the buying group, in the eyes of larger external wholesalers, (who are keen to access a potentially large market). Some buying groups also provide centralised online ordering capabilities to its members. This saves individual members time in accessing multiple systems, and negotiating with multiple suppliers of goods required. It also provides a useful comparison of wholesale prices and a simplified debt collection and credit control process.