Taking the time to carefully evaluate your vendors and suppliers can save your business some serious cash-and prevent some serious headaches for you
By Reed Richardson
It's a truism:
All businesses depend upon other businesses to survive, no matter what their size or industry. And while it's unlikely that any small business owner ever forgets this, after all they get plenty of bills to remind them of this every day and it's not uncommon for them to get so distracted running their own business, managing their own employees, and servicing their own customers that they fail to look upstream at their their suppliers and vendors with the same critical eye. But whether it's something as important as how you procure the raw materials for your best-selling product or as mundane as where you buy your copier paper, if you're not measuring the value that each of your vendors provides and examining ways to improve that relationship, you could be missing out on a significant opportunity.
"The purpose of the buyer/supplier relationship has not changed over time," acknowledges Dr. Laura Birou, writing in the Supply Management Handbook 2006. "However, the nature and characteristics of what makes these relationships effective has been dramatically altered." According to Birou, who is a senior supply chain consultant for ADR North America, the rapid rise of global sourcing, mass-customization, just-in-time delivery, e-commerce, and shortened product life cycles have all helped to dramatically refashion the two roles. And while these trends may appear to make the buyer-vendor connection increasingly distant and impersonal, Birou says this kind of thinking is a mistake. "On the contrary, supply chain relationships behave just as do all human relationships," she writes. "Some are stronger, resilient, and harmonious and can stand the test of time, while other relationships are full of conflict, unreliable, and crumble under pressure." So, the real question becomes: How does your small business ensure it promotes the former rather than the latter?
Pay for what you're getting. Don't pay for what you don't need.
The first thing small business owners must realize is that, just as their own company grows and evolves, so, too, must their relationships with their vendors and suppliers. "A lot of times, the small business owner was also the company's only purchasing agent when starting out," notes Birou, "So, there's a tendency on their part to want to go back to the same suppliers over and over again out of habit." This loyalty can have its drawbacks though, if it's not accompanied by a thorough understanding of why you're sticking with that particular vendor or supplier.
Perhaps the most common benchmark: price isn't necessarily the best, according to Birou. "You have to look at several different things" when assessing a supplier in the retail and manufacturing world, she says. "First off, you need to look at quality and capacity, and only then total cost, which is not the same as the piece price."
Likewise, the same principle holds true for professional firms and office-based small businesses, whose vendors are mostly confined to providing back office and administrative functions. Whether it's servicing your copier or insuring the health of your employees, if you're not considering intangible elements such as customer service and flexibility in addition to the hard dollar costs, you're not properly assessing the true value of what you're paying for.
If your current payroll provider, for example, has the ability to issue your employees' checks but can't manage programs like 401(k) retirement plans or wage garnishments, it might be time to upgrade to a company like ADP or Paychex that can handle these tasks, as well as other functions you may need such as benefits administration, background checks, etc. However, if you have a small, fairly stable office staff, paying substantial sums for a complex payroll system that has a lot of additional human resources bells and whistles might not be as cost effective as using a service that allows you or an employee to handle processing payroll online, giving you the basics such as check processing, tax filing, and direct deposit. Only you can make that judgment.
Similarly, when it comes to something as essential and as increasingly expensive as health insurance, it's important to fully understand your current coverage and whether it best meets your needs as well as that of your workforce. For instance, is your current plan charging you administrative costs above and beyond your monthly premiums? If so, that could mean your small business is being charged for services you're likely not using. By the same token, if your business deals in a heavy industry where workplace accidents can entail serious injury, like manufacturing or construction, and your health plan lacks a long-term disability option, you might have a hole in your coverage that undermines employee morale and fosters high turnover. Conversely, if your workforce consists largely of hourly and/or part-time administrative staff, there is no reason to be offering elaborate health insurance offering expensive long term care. There is no substitute for the task of reading your existing policy carefully so you can be sure you know what is in it.
The same analysis is necessary when considering all your other critical service vendors such as accountants, merchant processors, and telecom providers. For instance, is your accountant proactively looking for ways to save your business money by routinely reviewing your company's cash flow and tax structure or are they simply going through the motions of filing your quarterly and annual statements? Are your merchant providers offering lots of sophisticated credit card processing features more appropriate for a large department store than a relatively small operation like yours? Do you need to accept Visa, MasterCard, American Express, debit cards, and phone orders? If not, what are the alternatives most critical to you and your customers? (An aggregator site like creditcardproposal.com allows you to receive and compare proposals from multiple vendors and select the one that's right for you. A similar service is offered by ehealthinsurance.com for health insurance providers.) Similarly, is your telecom service able to scale and expand along with your business?
Again, if the answer to these questions is no, consider what alternatives are the most critical to you and your customers and then compare what they should cost to what you are paying. A little homework on alternative providers might save you a significant amount of money and get you better service as well. It takes time and discipline to go through the analysis, but in the end you'll be glad you did.
Score your way to better supplier performance
"If you don't measure it, you can't manage it," is now a firmly established mantra within the world of business. Yet many of the same companies that devote countless hours to tracking sales and projecting revenue may at the same time blithely ignore the overall performance of their vendors and suppliers. In fact, a 2006 study by Ventana Research found that when it came to the use of internal scorecards to track performance, companies deployed these measurement tools more than twice as often for the areas of finance (46 percent) and sales (41 percent) than they did for supply chain operations (18 percent).
Why is this? Cindy Jutras, vice president of the Aberdeen Group consulting firm, says it's because many small companies lack the dedicated purchasing departments or enterprise resource planning (ERP) software common at large corporations. "So, many times small business owners have to produce these metrics themselves," she points out.
Despite this admitted disadvantage, Jutras still considers a lack of a performance measurement system perhaps the single biggest mistake made by small businesses when it comes to supply chain management. Giving a vendor or supplier such a free pass, she explains will, in the long run, come back to haunt you. "Certainly, a business will have less influence over their suppliers if they don't measure performance in some way." In fact, some experts have even suggested that the mere act of telling a supplier you'll be measuring them can result in improved performance. Tom Hatfield, chairman of the Louisville, Kentucky chapter of SCORE heartily agrees. "Think of it like your employees," he says. "You'd never go for years without giving them a review to assess their performance, so why do that with your suppliers?"
Indeed, Hatfield, who owned his own food brokerage business for 27 years and has a background in purchasing and logistics management, says there's no excuse for putting together even the most rudimentary of performance scorecards to ensure some sort of accountability from your suppliers. "If I was a small business owner today with, say, 20 vendors, I'd tell them all right when I signed the contract with them that I will be giving them quarterly performance reviews," Hatfield says. "Then, every 90 days, we'd talk or sit down together and I'd either go over what things they need to improve upon, or I would tell them they're doing a great job. If they're doing well, they'll love it, because nobody hates to hear good things about themselves and even if you have complaints about them, how much more appreciative will they be hearing about it then, instead of when they suddenly lose your business?"
Are your suppliers a good match for your business?
When asked about why it's important for entrepreneurs to seek out suppliers that share similar values and build strong relationships with them, Laura Birou tells this story. "When one of the nationwide pizza delivery chains was just starting out, they experienced a cash flow problem and, consequently, couldn't pay all of their vendors on their regular terms. One of their key suppliers, the one that produced the cardboard pizza boxes, could have stopped supplying them and effectively shut the company down, but they didn't. Why? Because the pizza company had already been able to get them to buy in to the idea of their business plan."
That kind of loyalty won't show up on an invoice, but there's no denying that it has intrinsic value. But how do you find and cultivate this kind of commitment from a vendor or supplier? According to Birou, it requires taking a more nuanced approach toward understanding a potential supplier, the first step of which involves doing what she calls a "values audit." This audit, Birou writes in Supply Management Handbook 2006, should target the overall compatibility of a supplier with one's business by examining intangible characteristics such as its reputation, financial practices, and any similarities in cultures and backgrounds. This is no easy task, she acknowledges, but she points out that the extra effort pays off since a wealth of research has found that "supply chain relationships that rate high on compatibility outperform others." "There has to be an element of trust in your relationship if you want a vendor to think of your business beyond its next payment," Birou says. And predicting which suppliers would be more likely take a leap of faith with you becomes much easier if you can determine which of them wouldn't be risking their own company's futures in doing so. In other words, that reservoir of potential trust can be determined by not only examining a potential supplier's industry and market but their individual profit-loss situation as well.
"For instance, if your manufacturing business's break-even point is at 60 percent, but your supplier needs to be running at 90 percent of capacity to break even, they could go into the red very quickly" if you stop taking deliveries or making payments, Birou notes, hardly a scenario that would lend itself toward forgiveness and flexibility. Conversely, a supplier or vendor that has a diverse customer base and a low break-even point will probably be more amenable to weathering any storms with you. Accordingly, Birou recommends always asking potential suppliers about their break-even points before signing any contract. "Most should be willing to divulge this information, but even if they don't, there are trade groups where you should be able to find industry standards," Birou says. "It's a critical piece of information, still, I never see it asked."
Collaborate & Cooperate
In the end, a supplier-customer relationship boils down to two companies working together so that they both can succeed. And even though Aberdeen Group's Jutras is a strong advocate of scoring supplier performance, she maintains that this process should be thought of in something other than an adversarial light. "Not looking at supply chain relationship as a collaboration is probably the second-biggest mistake a business can make, after not measuring it," she says.Nonetheless, working together with a vendor or supplier can, at times, be difficult for small business owners, Jutras acknowledges. "Keeping a vendor at arm's length can still feel more natural," she says. "The fear is that working together involves a commitment that many small business owners feel unprepared to make because they typically aren't good at forecasting and they have little to no control over their customers."
But in today's increasingly fickle, just-in-time business environment, Jutras notes that even just giving a supplier a heads up about anticipated surges or drops in demand can be the difference between making and losing money."Retailers get upside revenue benefits as well as efficiencies with improved collaboration through suppliers," noted Gartner Research supply chain analyst Andrew White in a recent vendor performance white paper. According to White, these many benefits can include things like the introduction of new products ahead of competitors, lower distribution costs, and reductions in out-of-stock situations.
This last example should be of particular importance to small businesses, since a landmark 2002 study confirmed what might be an obvious point of commerce: You can't sell what you don't have. Of the 71,000 worldwide consumers surveyed, between 21 and 43 percent of them-depending on the product category-chose to instead make a purchase from a competing company when confronted with an out-of-stock situation. The survey also discovered that another 25 percent of customers never returned to complete the transaction. So, as study's authors point out, "retailers are likely to lose almost one-half of the intended purchases when a customer confronts an out-of-stock situation." SCORE's Joe Hatfield, certainly agrees and says that he, too, emphasizes the importance of working with suppliers in a cooperative manner to ensure on-time delivery to the small retail and manufacturing companies he counsels. "To put product on your dock precisely when you need it is just as critical as price is today," he says. "All in all, it takes a lot of hand-holding and cultivating" to make supply chain relationships work effectively, Hatfield notes. But in the end, he says that smart businesses realize "I need my suppliers as much as they need me."
Reed Richardson is an associate writer/editor for Business 24/7 magazine