A supplier is defined as the person or organisation that provides a product or service to another business.
Finding a reliable and competitively-priced supplier is vital to the success of your business.
The terms that you negotiate with your supplier need to be based on:
the way that you pay them - overdraft, commercial bill paid for by bank, foreign currency
potential costs - administration, taxation, transport, general payments and transactions
possible risks - late payment to supplier, or faulty, late or undelivered goods
To ensure a productive working relationship, select suppliers who offer a quality service and meet your specific needs.
There are a number of national and international certification bodies that enable you to check the quality of a potential supplier.
The most widely recognised and respected of these is the International Organization for Standardization (ISO 9000) certificate.
ISO 9000 is a set of quality management standards that are used and recognised globally by thousands of companies in over 100 countries. Its purpose is to promote and facilitate international trade through the provision of a single set of standards that are accepted and respected throughout the world.
Choose suppliers who can meet your specific needs. For example, if faster turnaround is a priority for you, then there is no point in selecting on grounds of cost if the turnaround requirements cannot be met.
One way in which to formalise this is to draw up a service level agreement (SLA) between your business and your supplier.
With SLAs you can agree targets and specify performance standards that help to define and secure your business/supplier relationship. In most cases it will determine the major responsibilities of the business/supplier trading relationship. It will generally cover such issues as problem management, compensation, warranties and remedies, resolution of disputes and legal compliance. It can also be extremely useful if legal proceedings ensue.
Building good relationships with suppliers
It pays to invest time in building good relationships with your key suppliers. If you can save money or improve the quality of the goods or services you buy from your suppliers, your business stands to gain.
Hints on dealing with your suppliers
Consider some of the following when working with your suppliers:
- Meet your contacts face-to-face and see how their business operates. Understanding how your supplier works gives you a better sense of how it can benefit your business.
- Meet the people who'll be managing your account and make sure they can be easily contacted.
- Ask about their plans for development or expansion. Will this affect the goods or services they're providing to you?
- Help your suppliers by placing orders in good time, being clear about deadlines and paying on time.
- Keep an eye open for any opportunities you can pass their way - in a good customer-supplier relationship they'll do the same for you.
- Make your business important to your suppliers and they will work harder for you. Some suppliers may offer better deals if you promise to use them exclusively. However this may cause significant problems if they go out of business.
Don't ignore opportunities offered elsewhere. Keep your options open by monitoring the deals offered by other suppliers.
Consider whether a contract or a service level agreement (SLA) is necessary. This process will guard against complacency on the part of the supplier.
How you can help your key suppliers
It is in everyone's interests that you do well out of key supplier relationships. Suppliers warrant careful attention, as their performance may be crucial to your business.
Here are some ways that you can help your key suppliers:
- Co-ordinate your production schedule with theirs.
- Discuss ways to reduce overall costs through size or timing of orders/contracts.
- Consider additional products or services that your supplier could provide.
- Update them on strategic changes or new products early on - this helps them adapt to meet those changes.
- Analyse how well you forecast sales and plan to meet your supply needs. Sharing the results of this analysis with your suppliers will allow you to develop accurate sales plans and hone shared sales forecasts and schedules.
- Use a purchase order system to control and monitor the buying of goods and services from suppliers - this facilitates internal financial controls and prevents specification misunderstandings at the supplier's end.
- Pay bills promptly. Paying late will put a strain on your relationship with the supplier and could lead to less favourable terms in future. Ideally you should have a payment policy that commits your business to paying undisputed bills on time - a copy should be sent to your suppliers.
There are many ways in which technology - especially Internet-based communications - can help you develop and maintain a good relationship with your suppliers.
Use technology to improve efficiency
A high speed Internet connection such as broadband will allow you to collaborate more closely with your suppliers through sharing plans, forecasts and consumer data. Sharing such information with your suppliers makes it easier for you to:
- analyse real-time information about sales, orders or market trends
- forecast and react quickly to changes in demand
- improve efficiency - accurate information on stock means you will only order the supplies you need
E-collaboration with your suppliers, such as using email and sharing spreadsheets, can be simple, but the greatest benefits come from sharing information in "real time". This requires more sophisticated technology, such as the following:
- Inventory planning or forecasting systems - use your inventory records to forecast the market demand for your product.
- Online analytical processing systems - analyse past sales performances and compare the forecasts from different suppliers.
- Enterprise resource planning (ERP) systems - can plan and schedule your entire business. By connecting your order and purchasing system with that of your suppliers, orders can automatically be placed and tracked and the supplier will automatically issue an invoice.
These systems can be very expensive. ERP systems can be rented from an Application Service Provider - however there will still be some extra costs, such as staff training.
When sharing information, make sure that your data and your suppliers' data is protected.
Service level agreements
Service level agreements (SLAs) are agreements or contracts with suppliers that define the service they must provide and the level of service to be delivered, and which also set out responsibilities and priorities.
SLAs themselves are contractual obligations and are often built into a contract - in the form of one or more clauses or as an entire section. SLAs can be used in any supplier contract where a business' ability to meet its customer requirements is dependent on the supplier.
SLAs are complex documents that should be well defined and cannot be drawn up in an ad hoc fashion.
Drawing up an SLA
It is important that you are involved in drawing up the agreement together with the supplier.
Typical SLAs set out:
- the service being provided
- the standards of service
- the timetable for delivery
- respective responsibilities of supplier and customer
- provisions for legal and regulatory compliance
- mechanisms for monitoring and reporting of service
- payment terms
- how disputes will be resolved
- confidentiality and non-disclosure provisions
- termination conditions
If suppliers fail to meet agreed levels of service, SLAs usually provide for compensation, commonly in the form of rebates on monthly service charges. When drawing up your SLA with your supplier, highlight the most critical components of the deal so you can apply the strictest penalties to these. Build periodic performance reviews into the SLA.
SLAs require constant discussion and updating. If the needs of your business change, you may require different performance criteria. Likewise, improvements in technology should be taken into account when reviewing your SLA.
Review your suppliers' performance
It is a good idea to review your suppliers' performance at regular intervals. If you have a service level agreement (SLA) this will help you to assess the business/supplier relationship in the most objective way possible.
If not, even at this stage it may be worth using an SLA to define the terms and level of service you require from your supplier. The review process is particularly important as it will prevent existing suppliers becoming complacent.
Asking the following essential questions will help you ensure you are getting the best possible deal:
- Price - are you getting the best price? Does your supplier offer bulk discounts or other favourable terms?
- Quality - are you satisfied with the quality of your supplies?
- Innovation - do your suppliers regularly inform you of new products and services that might help improve your business?
- Delivery - are your suppliers punctual? Do the supplies arrive in good condition?
- Account management - do your suppliers respond quickly to any orders or queries that you place with them?
- SLAs - are your suppliers living up to their end of the agreement?
If, after the review process, you find that your suppliers are not living up to certain aspects of your agreement, the SLA will usually provide for compensation, commonly in the form of rebates on monthly service charges.
You'll also need to review your own performance. For example, failing to pay your suppliers on time won't encourage them to keep their standards high.
Ending supplier contracts
There are many reasons for terminating a contract with a supplier. They might consistently fail to provide you with services or goods that meet your requirements, or you may find a cheaper or more reliable supplier elsewhere, for example.
First check the contract to see whether there are penalties for terminating the deal early. Ideally, when drawing up the contract, you will have agreed an exit clause that minimises what you have to pay. Otherwise, the penalties may be such that you are effectively locked in with that supplier. If the quality and effectiveness of your supplier decreases, your business may suffer.
As well as financial barriers to changing suppliers, you will also face operational ones. There may be disruption to your business when you switch to a new supplier with different processes or systems.
Make sure that your existing supplier gives you all the information you need to make the transition smoother. If possible, negotiate so that your new supplier takes responsibility for handling the changeover process.
To avoid such problems you should think about the possible pitfalls of ending a contract early at the contract negotiation stage. For example, if the contract is for bespoke software, you should make sure that ownership of intellectual property is clearly defined at the outset.
You should consider seeking legal advice when drawing up important contracts.It is a good idea to have guidelines in place for how you handle the termination of a supplier contract to help you to avoid alienating a supplier you may need at a later date. Explain to the supplier why you are ending the contract. They may be able to offer you a better deal - and save you disruption - by lowering the price or raising the quality of goods or services they provide.
Case Study: Here's how I reduced supplier costs
Ros Lee is administration director for contract publishing company McMillan-Scott. When she joined the business, one of her first challenges was to rethink the way suppliers were managed. A thorough review and cost analysis led to a new purchasing policy and significant savings.
What I did
Look at the figures
"When we started our supplier review, the company didn't have an official purchasing policy. Like many businesses, we had grown significantly but purchasing systems hadn't caught up. Staff were still ordering supplies on an ad hoc basis.
"The first thing we did was to list all our suppliers and calculate the current spend on everything from stationery to company cars. Once we had all the information in a central database, we could look at areas for improvement.
"It was clear that there was scope to cut costs by centralising all purchasing, rationalising our supplier base and negotiating better deals with key suppliers."
Communicate with suppliers and staff
"The next step was to consult with existing suppliers and investigate alternatives. Even where there were cheaper options, we didn't dismiss existing suppliers out of hand. We talked to them face-to-face to explain our new purchasing policy. We wanted to give them a chance to compete with the other suppliers we were considering.
"We also made sure new suppliers understood our needs and that we understood the way they operated. Developing good relationships from the outset is important. If you help your suppliers, they'll be more willing to help you.
"It was essential to put an end to ad hoc buying, so the new policy was immediately circulated to all staff. There was some initial resistance, but by talking to them and listening to their concerns we overcame it. One major staff worry was that product quality would decline, making their jobs harder. We were careful to provide a product sample for testing whenever a substitution was planned."
Monitor and review
"Some savings are apparent straight away. For example, changing our stationery supplier resulted in an immediate 20 per cent cost reduction, while limiting supplier choice for company cars led to an average 15 per cent discount on prices.
"We also undertook a formal annual review of our purchasing policy. We compared costs year on year and assessed product quality and service performance across all our suppliers. Staff feedback was taken into account and key findings were communicated to suppliers where appropriate."
What I'd do differently
Balance cost against service
"The ultimate goal of a purchasing policy is to control costs. But good supplier relationships are based on more than just money. We learnt a few lessons in the early days.
"For example, we switched telephone suppliers to gain a huge cost saving. But the service levels didn't meet our needs and the business suffered temporarily. Before long, we reverted to our original supplier. Now, every decision we make to retain a supplier or take on a new one involves careful analysis of service levels."
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