Choosing the right supplier for your business can be complicated, especially if a large portion of your product comes from a single company. For many companies, supplies are secondary only to labor in their expenses. But choosing the right supplier has even more far-reaching impact. Besides costs, the right supplier also has an impact on supply chain, product quality, and client satisfaction.
If you are at an early stage of your business, you should consider whether you need a supplier or if there are certain things you can supply on your own. If you choose to manufacture your own products–or write your own code–it is called vertical integration. Vertical integration makes sense if you can make the product cheaper and/or with higher quality than a supplier would be able to. This all obviously depends on what industry you operate in and what kinds of products you offer. However, if you are familiar with Henry Ford and the benefits of the assembly line, you understand the importance of specialization. Even if you can produce the product yourself at a cheaper price, your business will suffer if customers aren’t getting the quality they are paying for.
What to Look for in a Supplier
If vertical integration isn’t an option, there are several things to consider before choosing a supplier.
Price is the most obvious factor to consider when choosing a supplier and can have the appearance of being the most important. A business will typically do everything it can to improve margins, which means controlling raw materials costs. However, as mentioned above, if you cut costs too much and sacrifice on quality, your long-term business will suffer. The important thing to remember is to simply do your research. Call multiple suppliers, get price quotes, consider reputation, ask for references, and know what you’re getting into.
Considering the supplier structure in your industry is also very important. If you are the only buyer, for example, with several suppliers, you can demand lower prices and control things a bit better. The opposite is also true: one supplier and several buyers means they set the terms and you become a price taker. Remember as well that if buyers place too much downward pressure on prices, something is going to suffer.
This very well may be the most important factor. Without it, neither company will operate at their full potential. Trust can be challenging, especially if you are sourcing overseas and lack familiarity with the laws, customs, and culture. Language, for example, can be a significant factor in itself. If you can’t call your supplier up and have a direct conversation when you need to, it can cause serious risks. I’ve had several clients here in Utah run into this issue. It often makes much more sense to buy from a warehouse in Thailand or China. However, few people know the language, and unless your supplier knows English, communication challenges may make things more difficult down the line.
Another thing that can help with trust is having an equity position. Many large retailers have significant equity stakes in their supplies, which naturally aligns incentives.
I had a client a number of years ago who had three main suppliers. I’ll call them A, B, and C. They had a working relationship with A for 15 years when they decided to stop supplying my client with a portion of their products. The key decision makers of firm A only visited my client a few times over this 15-year period and rarely made much effort to work with them. In the meantime, B and C had been in frequent contact with them, examining how my client sold, who their customers were, their core values, etc. One of them even hired an outside consulting firm to figure out ways they could grow together. The point of this example was to highlight the importance of this relationship and what kind of impact it can have on your business. A good supplier understands that your businesses grow together.
Many additional considerations should be considered in the process. The last thing you want is to have your supply chain dry up at a critical time like a peak sales season. Consider how the services of an outside CFO can help in your search.
About the Author
Jerry Vance is the founder and managing partner of Preferred CFO. With over 16 years of experience providing CFO consulting services to over 300 organizations, and 30 years in the financial industry, Jerry is one of the most experienced outsourced CFOs in the United States.
You may also be interested in...
What is GAAP and Why is it Important?
Generally Accepted Accounting Priciples (GAAP) Financial reporting is an important part of business that communicates the financial performance and results of a company. It records and presents information about the company’s financial position, revenues, expenses,...
Easing the Financial Year-End Close
The end of the fiscal year can be highly stressful for financial officers and corporate executives. The year-end closing procedure is time-consuming and sometimes brings unpleasant surprises. Particularly in times of economic downturn and short staffing, year-end...
Does My Business Need a Financial Advisor?
The wise business owner will “know what they don’t know,” and will seek the appropriate experts such as financial advisors to fill those gaps.
3 Reasons you Need a Financial Forecast
If Your Company Doesn't Have a Financial Forecast, You're Wasting Time and Money Every company has goals. Where do you want your organization to be 5 years from now? 10 years? Most even have a general idea of the benchmarks you need to hit to get there—"By increasing...
Determining the Payback Period of a Business Investment
Whether implementing a new software system, adding office space, acquiring another company, or any other substantial investment, companies want to know how long it will take to recoup the money they spend on major purchases. The way to determine this is by calculating...
10 Steps to Prepare for Raising Capital
Finding funding for your business is a process that takes a lot of time and effort, especially during the startup phase. Many entrepreneurs fail in their first attempts at fundraising because they are poorly prepared. Others get themselves into trouble by choosing the...
How Can a Fractional CFO Help You Save Money?
In these days of economic challenges and changes, many companies struggle with uncertainty about the future, seeking tools and resources to best position their businesses for financial success. Often it can be beneficial to bring in a financial advisor who has...
What is a Capitalization Table and Why Does it Matter?
Capitalization tables, commonly called “cap tables,” are highly useful spreadsheets maintained by companies that have multiple owners or investors. Cap tables are especially important for private companies at startup and in the early stages of the enterprise. They...
Top Benefits of Financial Staff Augmentation
Many companies experience times when they find their accounting departments short on staff or short on expertise. Sometimes emergencies and financial needs arise that are beyond the capability of their financial personnel to address. This is particularly true in times...
Qualities of an Effective Profit & Loss Report
A Profit and Loss (P&L) Report, also called a Profit and Loss Statement, is a key financial document that details a company’s income and expenses over a specific period of time. This time period is typically a month, a quarter or a year. Depending on company needs...
What Is a Quality of Earnings Report?
When a business sale, acquisition, or major investment is contemplated, one important step in the due diligence process is the generation of a Quality of Earnings report, sometimes abbreviated as QOE. Even though a company may have strong financial statements, those...
What Is the Purpose of Accrual Accounting?
What Is the Purpose of Accrual Accounting? There are two methods of accounting: cash and accrual. In cash accounting, transactions are recorded when payment occurs. In the accrual method, revenues and expenses are matched and recorded at the time the good is delivered...