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.
Vertical Integration
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
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.
Trust
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.
Service
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.
Final Thoughts
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
Tom Barrett is a skilled CFO with extensive experience. His financial expertise is key to helping companies with strategic financial planning, data analysis, risk assessment, budgeting, forecasting, cash flow management, and much more.
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