Small Business Taxes & ManagementTM--Copyright 2013, A/N Group, Inc.
In a recent article (Fire Your Customer?) we discussed when it makes sense to fire a customer. Some of the same issues can arise when dealing with vendors, suppliers, or independent contractors, some are clearly different. While dropping a supplier may not impact the business like dropping a customer, it shouldn't be done without careful reasoning. Here are some of the factors you want to consider.
Price. This is obviously a prime consideration, but it shouldn't be the only one. If you're buying a commodity item that is available from several sources and there's no difference in quality, delivery, etc. price is probably the most important factor. But for most businesses it's rare that there are no differences in other factors. They may be subtle differences in quality, support, etc. The big question is, do you care? While quality is often second only to price in importance, many other factors may not be of concern. For example, you use about 20,000 gallons of paint a year. Madison's delivery time is almost twice as long as a competitor with a slightly higher price, but you've got unused warehouse space that allows you to anticipate the long lead time.
Quality. Quality is often the first or second, consideration. Sometimes you can afford to take a step down in quality. That could be a product that a consumer would use infrequently. But you've got to be careful. You don't want to accept a lower quality at the risk of getting sued or losing customers. Unfortunately, one of the ways for a supplier to boost his own profits is by reducing quality where it can't be easily detected. Watch out for changes in the product (weight, finish, etc.) or service. You should be particularly on the alert for uneven quality. That could be more of an issue than lower quality if you're a manufacturer or have to install the product affect production speed, handling difficulties, etc. Caution. You can't skimp on quality if that's your major selling point.
Delivery times. Many customers are now using a just-in-time inventory approach. That means consistent delivery times are critical. Even if that's not your situation, you still want to know when the item will be delivered or the service performed. Unless you've got considerable slack time built into your system (rare these days) late deliveries can be costly. Early deliveries can be almost as disruptive. Suppliers who can no longer consistently deliver on time should be candidates for a cut.
Shipping costs. They're unlikely to go down. You may want to reconsider suppliers where shipping costs are rising fast. Closer suppliers can not only save on shipping costs but can reduce delivery times.
Company stability. This one can be hard to judge based on outside factors, but there are often hints when a company is in trouble. Changes in salesmen, employee turnover in general, problems with orders, shipping, etc., quality issues, etc. Multiple reorganizations of territories and operations are a also tipoffs. If you are aware the company is in financial difficulty it's not unusual for problems to escalate.
Change in business policy or new owners. You may have had a good relationship with the company--longer terms at certain times of the year, rush delivery, etc.--that made it particularly attractive to work with the supplier. But that's changing. New owners are looking at all aspects of the business in an attempt to boost profitability. Or you hear the current owners are looking for a buyer. That could presage a major change. If the products or services you're buying aren't core to the company, or you know they aren't particularly profitable, you should be on the alert.
Questionable practices. You might want to avoid being linked to companies with questionable business practices. The first example that comes to mind are suppliers who use underage or underpaid labor. While that's mostly foreign suppliers, that isn't always the case. More than a few U.S. companies have been caught underpaying employees, using illegal immigrants, etc. While it's often difficult to avoid a link, make sure you're insulated enough. Companies that cut corners on one item often do so in other ways such as adulterating the product, using cheap material and charging for the higher quality, etc. If you suspect such acts, consider another supplier.
Single source. If the supplier is your single source, or worse is the only source available, you should be looking for alternatives, even if you don't use them. With consolidation and less competition in many area this could threaten your business. We know of one distributor 80% of whose business consisted of selling one product line. The line was highly profitable so there was no incentive to diversify. But the manufacturer decided to deal direct with customers. When the annual contract was up for renewal the distributor was told of the company's decision. You should be more wary if your single source is a large or small company. A large company may find your business insignificant. A small company might be vulnerable to financial problems, health of principals, etc.
Continuously looking for new sources. If you're totally satisfied with your current supplier, you should always be looking for alternatives. You never know when a supplier will drop a product line, raise prices, or for some reason not be able to deliver.
Sole source or out to bid? You may be able to get better pricing if a particular supplier is a sole source. There can be any number of reasons for that. But there are also situations where using more than one supplier can reduce your costs. There are other advantages to using more than one supplier including reducing dependency on one source. That can allow you to avoid supply issues if the vendor has problems.
Terms. This can be an important issue for a smaller business. Being able to delay payment for 60, 90 or more days can allow you to reduce or avoid outside financing for inventory.
Copyright 2013 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Articles in this publication are not intended to be used, and cannot be used, for the purpose of avoiding accuracy-related penalties that may be imposed on a taxpayer. The information is not necessarily a complete summary of all materials on the subject. Copyright is not claimed on material from U.S. Government sources.--ISBN 1089-1536
--Last Update 09/30/13