Choosing and managing suppliers

1 Overview
2 What you should look for in a supplier
3 Finding and choosing potential suppliers
4 Negotiating with suppliers
5 Drawing up service level agreements with suppliers
6 Building good relationships with suppliers
7 Ending supplier contracts

1. Overview

When choosing and negotiating with suppliers, you need to consider a number of different factors. How you weigh up the importance of these different factors will depend on your business priorities and strategy.

This will help you decide what you need in a supplier, identify potential suppliers and choose your suppliers. It will also show you how to manage your relationships with suppliers and negotiate the best possible deal.

2. What you should look for in a supplier

There are a number of key characteristics that you should look for when identifying and short listing possible suppliers.

Quality and reliability

The quality of your supplies needs to be consistent - your customers associate poor quality with you, not your suppliers. Equally, if your supplier lets you down with a late delivery or faulty supplies, you may let your customer down.

Speed and flexibility

Flexible suppliers help you respond quickly to changing customer demands and sudden emergencies.

Value for money

The lowest price is not always the best value for money. If you want reliability and quality from your suppliers, you'll have to decide how much you're willing to pay for your supplies and the balance you want to strike between cost, reliability, quality and service.

Strong service and clear communication

You need your suppliers to deliver on time, or to be honest and give you plenty of warning if they can't. The best suppliers will want to talk with you regularly to find out what needs you have now and how they can serve you better in the future.

Financial security

It's always worth making sure your supplier has sufficiently strong cashflow to deliver what you want, when you need it. A credit check will help reassure you that they won't go out of business when you need them most.

3. Finding and choosing potential suppliers

You can find suppliers through a variety of channels. It's best to build up a shortlist of possible suppliers through a combination of sources to give you a broader base to choose from. These include:

  • recommendations from friends or business acquaintences
  • directories
  • trade associations - if you needs are specific to a particular industry
  • business advisers - Business Gateway advisers can offer advice on all areas of business
  • exhibitions
  • trade press

Drawing up a shortlist of suppliers

Once you have got a clear idea of what you need to buy and you have identified some potential suppliers, you can build a shortlist of sources that meet your needs. Ask yourself:

  • Can these suppliers deliver what you want, when you want it?
  • Are they financially secure?
  • How long have they been established?
  • Do you know anyone who has used and can recommend them?
  • Are they on any approved supplier lists from trade associations or government?

Once you have a manageable shortlist, approach the potential suppliers. Provide a clear brief, summarising what your requirements are and giving an idea of the level of business you hope to place. When you have got the responses, compare the suppliers in terms of what matters most to you.

Wherever possible, meet potential suppliers face to face and see how their businesses operate.

Check whether your supplier will be outsourcing any work to subcontractors, or relies on other suppliers for critical components or services. If so, you may want to assess these suppliers as well.

Remember that your business' reputation may be judged on the labour practices and environmental record of your suppliers. You should consider the ethical and environmental impact of your supply chain.

Before signing a contract with any supplier, you should carry out due diligence to check it can fulfil the agreement. You should credit check potential suppliers to ensure they have the cashflow to deliver what you want, when you need it. It's also a good idea to get references for the supplier from other customers.

4. Negotiating with suppliers

Once you have decided which suppliers you want to work with, you need to negotiate terms.

Before you start to negotiate, draw up a list of the factors that are most important to you, such as price, delivery schedule or payment terms. Decide what you are - and aren't - prepared to compromise on.

It's essential to plan your strategy in writing before beginning negotiations. This will help you set clear goals and work out where you will draw the line and walk away from the deal.

Before you start negotiating, state the aspects of the deal you're happy with and the points you want to discuss. Ask the supplier to do the same.

Don't indicate that there are things you're prepared to concede on or compromise on too early in the negotiations. Instead, use these as bargaining chips, making concessions in return for concessions made by your supplier.

Push the supplier to indicate a starting price and details of any discounts offered early in the negotiation. Never accept the first offer - make a low counter offer in return. The other party is likely to come back with a revised figure. Always ask what else they can include at the given price.

If the price is suspiciously low, ask yourself why. Are the goods of sufficiently high quality? Do they really offer value for money? What will after-sales service be like?

If the price includes features you don't need, try to lower it by asking to remove those features from the deal.

You can also use your bargaining power to get a good deal. For example, if you're a big customer of the supplier, you could ask for bulk discounts.

If you squeeze the price too low - perhaps by threatening to walk away from the negotiations - you may end up getting a poor deal. The supplier may have to cut costs elsewhere - in an area such as customer service, which could prove costly to you in the long run.

Set out in writing the key points of any agreement you reach.

5. Drawing up service level agreements with suppliers

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 service is being provided.

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
  • service monitoring and reporting mechanisms
  • 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 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.

In some cases, you may need to accept a supplier's standard SLA. If the SLA does not guarantee the service quality you require, you may need to look for alternative suppliers or make contingency plans to deal with any problems.

Build periodic performance reviews into the SLA. 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.

You may want to sign up to the Prompt Payment Code (PPC), a joint initiative of the Institute of Credit Management (ICM) and the Department of Business, Innovation & Skills (BIS) to help tackle late payment. Businesses that sign up to the code commit to paying their suppliers on time and to providing clear guidance on payment procedures.

The code is endorsed by several major banks and business organisations. Businesses that have signed up to the code are allowed to display the PPC logo.

6. Building good relationships with suppliers

It pays to invest time in building good relationships with your key suppliers. Consider doing the following:

  • 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.
  • Keep in regular contact and update them on strategic changes or new products early on. This helps them adapt to meet those changes.
  • 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.
  • Make sure you have efficient purchasing, stock control and payment systems.
  • 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.

7. 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.

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 mean you are effectively locked in with that supplier.

As well as financial barriers to changing suppliers, 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. 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.

For more information, read our guide on outsourcing.

Contact your local Business Gateway office.

Your local office will be able to answer your questions on this or any other business subject. 

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Guide

Outsourcing