A SECTION FOR ENTREPRENEURS: Crash course - Assessing a rookie supplier

A SECTION FOR ENTREPRENEURS: Crash course - Assessing a rookie supplier - A company you've never heard of is offering to supply one of your vital components at a lower cost than the outfit you've been using for years. You're not sure what to do and you've realised that you need a methodical approach to choosing your suppliers.

by Alexander Garrett
Last Updated: 31 Aug 2010

A company you've never heard of is offering to supply one of your vital components at a lower cost than the outfit you've been using for years. You're not sure what to do and you've realised that you need a methodical approach to choosing your suppliers.

THINK THROUGH YOUR NEEDS. 'You must be clear on what you're looking for from a supplier. This is not always the case, and the SME/supplier relationship gets off on the wrong footing,' says Fiona Shafer, MD of Omega Blue Consulting.

LOOK FOR ADDED VALUE. 'The three standard issues on which suppliers are chosen are cost, delivery speed and the quality of goods or service,' says Marc Day of Henley Management College. Consider what the supplier can offer above and beyond the norm. 'Ask yourself what you would want to support the markets that you compete in. What would make you better than your competitors?'

DO THE DILIGENCE. Like customers, suppliers represent a financial risk. If a key supplier goes bust, your own customer contracts may be jeopardized and you'd have to look for a replace- ment, perhaps on unfavourable terms. Search at Companies House, consult credit agencies and financial databases. Apart from a record of profitability, you should look at how the firm is financed and its ratio of assets to liabilities. And visit their premises.

REPUTATION MATTERS. Kathryn Britten, forensic accounting partner at BDO Stoy Hayward, says: 'A lot of disputes arise because companies form relationships with somebody they should have steered clear of.' Ask for references from the supplier's customers. Shafer advises: 'Be specific in your questioning. Ask about levels of efficiency, speed of delivery, quality, complaint handling etc. Also, make sure that the referees are not just their mates.' Search trade press archives for positive or negative stories, and check their accounts for any ongoing litigation.

THINK LONG-TERM. Many suppliers are chosen on the basis of immediate needs, without looking ahead. 'Your customers' needs are likely to change, so ask yourself: if you needed something tomorrow, would they be able to supply it?' says Day.

GET IT ON PAPER. Too many companies rely on verbal agreements, says Britten. For supplies that are key to your business you should have a formal contract. As well as the basics such as the type of commitment, pricing and delivery timings, this should cover penalties for non-supply and late payment, as well as how disputes will be resolved. If a company has ISO9000 it must have a quality management system that includes complaints handling.

CHECK THE SMALL PRINT. 'Make sure the terms are ones you can comply with,' says Britten. 'For example, there may be a requirement that you take a certain volume of goods irrespective of needs. Take legal advice to iron out any ambiguities.'

WHO'S IN THE DRIVING SEAT? It is desirable to be a significant customer to your supplier, says Day. 'But even if you represent only 1% of their sales, that means they only need another 99 customers like you, so you are valuable and you can make use of that. But if they have a monopoly of supply, then no matter how small they are, they are in the driving seat.'

USE YOUR NEGOTIATING EXPERTISE. 'Why not let your sales team negotiate your own contracts?' suggests Day. 'It will help them to develop and to see things from the other side.'

DO SAY: 'Our suppliers are long-term partners chosen for the contribution they can make to our business.'

DON'T SAY: 'I want all our orders to go to these people from now on. I met their sales director on the golf course and he promised me we'd get a brilliant deal.'

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