BizMove General Management

Merchandise Management: Selecting Suppliers

BizMove business management guides

 

Selecting Suppliers

Regarding merchandise management, Every business must periodically review and evaluate its present suppliers and compare them with alternate suppliers.

In some cases where you have a very limited selection of suppliers, this may be an easy task. However, if you can buy nationwide, or worldwide, you can never be certain that you have the very best supplier.

Furthermore, for every important component which you buy, more than one supplier should be available so you are protected in case of emergency.

What Makes a Desirable Supplier

When evaluating a supplier, several characteristics should be considered:

Reliability of the material - Is quality consistent from one unit to the next? This may concern the physical characteristics of the product, as well as efficiencies and durability in operation and the number of units that fail to stand up during use the way customers have the right to expect.

Price - There are many aspects to price in addition to a low price. Lowest price is not necessarily a primary indication of a good supplier. A desirable supplier can be counted on to charge fairly when something has to be ordered urgently and price cannot be established. When orders are increased, when changes in specification have to be made or when misunderstandings occur which lead to damage or rework, in these situations it is important to have a supplier who is fair and reasonable. Reasonable quantity discounts and credit terms are two other aspects on which the quality of a supplier can be judged.

Delivery - Quick and reliable delivery from a supplier is always desirable. When delivery is unreliable, problems of stock-out can occur which creates the need to keep unnecessarily high safety stocks in inventory. Slow delivery can also result in the need to maintain larger average inventories because it is more difficult to predict how many units will be required between order date and delivery.

Servicing Problems - Another aspect of supplier quality concerns the way the supplier adjusts shortages in delivery, and provides repair or replacement of unsatisfactory or defective material.

Stability - You want suppliers who have the financial and managerial resources to provide an uninterrupted flow of goods or services.

Special Services - Suppliers who agree to space deliveries are more desirable than those who don't. They allow you to take advantage of quantity discounts by purchasing larger quantities yet do not make it necessary for you to increase storage space or inventory carrying costs by delivering the entire order at once. Other services that may make some suppliers more desirable than others include creativity in problem solving and in making suggestions for improvements in usage of the materials they supply.

Accessibility of Seller - Sellers that are difficult to contact, are less desirable than those whose decision makers are available for quick quotations or for discussions to rectify any problems that may come up.

ON-THE-JOB ACTIVITY

Evaluate two or three of your present suppliers on the basis of the checklist provided above to determine how desirable each one is.

If possible, discuss your thoughts with a person whose opinion you respect and see what additional ideas come from such a discussion.

Sources of Information About Suppliers

Information about suppliers may be obtained in several ways:

1. An interview with the seller. It is usually possible to obtain the information you need about a supplier from the sales representative who calls on you. You can ask questions concerning the quality of the product, price, service and delivery, and obtain references you can check to verify the information you receive.

2. Visiting the supplier. A visit with a supplier of important components or materials is sometimes desirable when you should know how well equipped the supplier is to meet your needs. Such a visit can give you firsthand insight into the adequacy of the supplier's manufacturing facilities and knowledge of technology as well as labor relations and quality and production control procedures. The supplier's financial standing and managerial capabilities can also be reviewed. During such a visit you can look at the supplier's basis for quoting prices, discounts, terms and delivery. Such visits should be made only after the choice of vendors has been narrowed down to just a few potential suppliers.

3. From a cost breakdown or cost analysis. Since costs are of major importance in the determination of price in many negotiated purchases, it is useful for buyers to obtain a good understanding of product costs. Most suppliers calculate their overhead and general administrative expenses as a proportion of direct labor and/or direct material.

Smart buyers, therefore, look to help suppliers achieve reductions in the supplier's direct costs (possibly through joint value analysis), since these are likely to have a greater impact on price than other cost savings or a reduction in the supplier's percentage of profit.

Cost analysis is not needed in all purchasing situations. It obviously will be worth the investment in time and effort only if the quantity is large.

In analyzing costs, it is also important to remember that many factors affect the costs of individual firms and even the costs of individual products. Thus, a specific firm may be a high cost producer for one item and a low cost producer for another.

In situations where only one supplier is available or preferred for various reasons not related to price, cost analysis may be the only way for determining whether prices are fair and reasonable. In such a situation, the price is usually negotiated. At the start of such a negotiated purchase, it is desirable to request a cost breakdown from the supplier.

Such a cost analysis might include cost information on:

  • material and purchased parts
  • scrap and salvage value (if any)
  • direct labor
  • overhead calculation
  • engineering and development expenses, where applicable
  • general and administrative expense calculation
  • depreciation of special equipment

4. References from others who use the supplier. Business contacts and references provided by the vendor can often provide information about the quality of products and services of a supplier. This is also one way to find out how well the written and verbal word of the supplier corresponds with actual performance.

5. Trial business with the supplier. When purchasing from a new supplier, it is often desirable to make a few small purchases to see how well the supplier fulfills agreed-upon obligations. When conducting trial business with a supplier, it can be beneficial to maintain large safety stocks of the material being purchased, as insurance.

6. Supplier catalogs. Catalogs are a frequently used source of information about those suppliers who provide them. Such catalogs are useful not only to determine potential sources of supply but also, on occasion, to obtain published prices.

7. Sales people. Most supplier sales representatives can provide information about possible sources of supply of non-competing products or services. Since they call on many different companies, salespeople can bring much information about the quality of suppliers and, when they do not know themselves, can get answers to your questions from some of their customers. All this information is available to the alert, open-minded buyer. However, salespeople can take up a great deal of your time. So as not to be bothered by salespeople at inopportune moments, you may wish to inform salespeople over the telephone or through signs, that there are specified times set aside during which your firm will be willing to see sales representatives.

Many small firms do not have so many salespeople call that specified times are necessary. When salespeople call, it is therefore better to limit the amount of time you spend with them, rather than to shut them out altogether.

8. Trade magazines. General and specialized trade journals often contain advertisements placed by suppliers as well as economic information of value for purchasing decisions.

9. Purchasing files. If you keep detailed files of brochures offering products and services, reviewing these when an occasion arises can provide you with valuable information for selecting a supplier.

10. Trade registers and directories. Thomas' Register of American Manufacturers is one of several widely known trade registers which contains information on the addresses, branches, affiliations, and often financial standing, of all leading manufacturers.

11. Trade exhibits. Exhibits provide an excellent opportunity for you to see a variety of suppliers and their services or products. They represent an opportunity to compare similar products of different manufacturers.

12. Yellow pages. The yellow pages within a phone directory contain an accurate listing of local suppliers.

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