TLIL5055 Manage a supply chain

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Supplier Selection Process Guide Choosing the right supplier involves much more than scanning a series of price lists. Your choice will depend on a wide range of factors such as value for money, quality, reliability and service. How you weigh up the importance of these different factors will be based on your business' priorities and strategy.

A strategic approach to choosing suppliers can also help to understand how your own potential customers weigh up their purchasing decisions.

This guide illustrates a step-by-step approach you can follow that should help you make the right choices. It will help you decide what you need in a supplier, identify potential suppliers and choose your supplier.

Thinking strategically when selecting suppliers The most effective suppliers are those who offer products or services that match - or exceed - the needs of your business. So when looking for suppliers, it's best to be sure of your business needs and what you want to achieve by buying, rather than simply paying for what suppliers want to sell you.

For example, if you want to cut down the time it takes you to serve your customers, suppliers that offer you faster delivery will rate higher than those that compete on price alone.

For some pointers to help you identify what you want from suppliers, see the page in this guide on what you should look for in a supplier.

The numbers game

It's well worth examining how many suppliers you really need. Buying from a carefully targeted group could have a number of benefits:

• it will be easier to control your suppliers • your business will become more important to them • you may be able to make deals that give you an extra competitive advantage

For example, if you've got a rush job for an important customer, your suppliers will be more likely to go the extra mile if you spend $1,000 a month than if you spend $250.

However, it's important to have a choice of sources. Buying from only one supplier can be dangerous -where do you go if they let you down, or even go out of business?

Equally, while exclusivity may spur some suppliers to offer you a better service, others may simply become complacent and drop their standards.

What you should look for in a supplier • Reliability • Remember - if they let you down, you may let your customer down. • Quality

The quality of your supplies needs to be consistent - your customers associate poor quality with you, not your suppliers.

Value for money

The lowest price is not always the best value for money. If you want reliability and quality from your suppliers, you'll have to decide how much you're willing to pay for your supplies and the balance you want to strike between cost, reliability, quality and service.

Strong service and clear communication

You need your suppliers to deliver on time, or to be honest and give you plenty of warning if they can't. The best suppliers will want to talk with you regularly to find out what needs you have and how they can serve you better.

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Financial security

It's always worth making sure your supplier has sufficiently strong cash flow to deliver what you want, when you need it. A credit check will help reassure you that they won't go out of business when you need them most.

A partnership approach

A strong relationship will benefit both sides. You want your suppliers to acknowledge how important your business is to them, so they make every effort to provide the best service possible. And you're more likely to create this response by showing your supplier how important they are to your business.

Identifying potential suppliers You can find suppliers through a variety of channels. It's best to build up a shortlist of possible suppliers through a combination of sources to give you a broader base to choose from.

Recommendations

Ask friends and business acquaintances. You're more likely to get an honest assessment of a business' strengths and weaknesses from someone who has used its services.

Directories

If you're looking for a supplier in your local area, it's worth trying directories such as Yellow Pages and Google.

Trade associations

If your needs are specific to a particular trade or industry, there will probably be a trade association that can match you with suitable suppliers.

Business advisors

Local business-support organisations, such as chambers of commerce, can often point you in the direction of potential suppliers.

Exhibitions

Exhibitions offer a great opportunity to talk with a number of potential suppliers in the same place at the same time. Before you go to an exhibition, it's a good idea to check that the exhibitors are relevant and suitable for your business.

Trade press

Trade magazines feature advertisements from potential suppliers.

Drawing up a shortlist of suppliers Once you've got a clear idea of what you need to buy and you've identified some potential suppliers, you can build a shortlist of sources that meet your needs.

When considering the firms on your shortlist, ask yourself the following questions:

• Can these suppliers deliver what you want, when you want it? • Are they financially secured? • How long have they been established? • Do you know anyone who has used and can recommend them? • Are they on any approved supplier lists from trade associations or government?

Do some research and try to slim your list down to no more than four or five candidates. It's a waste of time for you and the potential supplier if you approach them when there's little chance of them fulfilling your requirements.

Choosing a supplier Once you have a manageable shortlist, you can approach the potential suppliers and ask for a written quotation and, if appropriate, a sample. It's best to provide them with a clear brief summarising what you require, how frequently you'll require it and what level of business you hope to place.

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Get a quotation

It's worth asking potential suppliers to give you a firm price in writing for, say, three months. You can also ask about discounts for long-term or high-volume contracts.

Compare potential suppliers

When you've got the quotation, compare the potential suppliers in terms of what matters most to you. For example, the quality of their product or service may be most important, while their location may not matter.

• Price is important, but it shouldn't be the only reason you choose a supplier. Lower prices may reflect poorer quality goods and services which, in the long run, may not be the most cost effective option. Be confident that your supplier can make a sufficient margin at the price quoted for the business to be commercially viable.

• Check that the supplier you employ is the one that will be doing the work. Some suppliers may outsource work to subcontractors, in which case you should also investigate the subcontractor to determine if you are happy with this arrangement.

Wherever possible it is always a good idea to meet a potential supplier face to face and see how their business operates. Understanding how your supplier works will give you a better sense of how it can benefit your business.

And remember that your business' reputation may be judged on the labour practices of your suppliers. It makes good business sense to consider the ethical dimensions of your supply chain.

Negotiate terms and conditions

Once you've settled on the suppliers you'd like to work with, you can move on to negotiating terms and conditions and drawing up a contract.

Developing a Negotiating Strategy It's essential to plan your strategy in writing before beginning negotiations. This will help you set clear goals and work out where you will draw the line and walk away from the deal.

Start by defining what your priorities are, such as low price, high specification goods or a specific delivery schedule.

Think about different offers the supplier could make and what you are willing to concede or compromise on. For example, you may decide that you'll only pay the full price in exchange for fast turnaround.

Write down your negotiating strengths and how you might use them to get the concessions you require. Consider ways of defending the weaker parts of your argument and negating the supplier's main strengths.

Negotiating Team

Once you've set out your strategy, it is also essential to get your negotiating team right. Make sure it has skills in all the necessary areas.

You'll need to ensure you match the seniority of the supplier's representatives. For example, you shouldn't send a junior account manager to bargain with their managing director.

Make sure each member of the team is familiar with your negotiating strategy. The more confident they sound about what they want, the more likely they are to get it.

Conduct Negotiations

Before you start negotiating, state the aspects of the deal you're happy with and the points you want to discuss. Ask the supplier to do the same.

Make sure both sides are satisfied with what is being negotiated. Get the supplier to restate any discounts offered and payment terms. Keep these key bits of information to hand.

If you have enough bargaining power, insist on using your own terms and conditions of purchase.

Do not indicate that there are things you're prepared to concede or compromise on too early in the negotiations. Try to give the impression you're approaching the negotiations positively without revealing your position.

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For important or large purchases suggest setting out the key points of the deal in writing. For example, for the purchase of company cars, these might state your requirements, such as the make, year, model, the interior specification and delivery times.

You also need to be aware of common negotiating tactics. If the other party keeps referring to urgent deadlines or a person they need to confer with, remember they may be using pressure tactics. Use such tactics yourself with caution.

Don't allow pressure to force you into agreeing to a point you're not happy with. Ask for a break if you need one. Each time you agree to a point, clarify that you've understood it correctly and write it down.

In some trades, suppliers set artificially high prices that are then permanently discounted. If this scenario applies to your business then ensure that any concessions the supplier gives are real -negotiate discounts that go beyond the standard level.

Negotiating On Price

Some price negotiating techniques will be familiar if you've ever bartered at a market.

Never accept the first offer - make a low counter-offer in return. The other party is likely to come back with a revised figure. Always ask what else they can include at the given price.

If the price is suspiciously low, ask yourself why. Are the goods of sufficiently high quality? Do they really offer value for money? What will after-sales service be like?

You can also try to make the asking price look high by exposing any ongoing costs. Ask about repair costs, consumables and other expenses. If the current state of the supplier's market means prices are falling, point this out.

If the price includes features you don't need, try to lower it by asking to remove those features from the deal.

Use your bargaining power to get a good deal. For example, if you're a big customer of the supplier, you could ask for bulk discounts.

But remember that if you squeeze the price too low - perhaps by threatening to walk away from the negotiations - you may end up getting a poor deal. The supplier may have to cut costs elsewhere - in an area such as customer service, which could prove costly to you in the long run.

Even if you are a supplier's main customer and enjoy most of the bargaining power, forcing it to meet prices at which it could go out of business won't protect your reputation as a highly valued customer. The supplier will soon look for other customers and is likely to feel resentful.

Getting the right supplier for your business Know your needs

Make sure you know what you need. Don't be tempted by sales pitches that don't match your requirements. Understand the difference to your business between a strategic supplier, who provides goods or services that are essential to your business - such as high-value raw materials - and non-strategic suppliers who provide low-value supplies such as office stationery. You will need to spend much more time selecting and managing the former group than the latter.

Spend time on research

Choosing the right suppliers is essential for your business. Don't try to save time by buying from the first supplier you find that may be suitable.

Ask around

People or other businesses with first-hand experience of suppliers can give you useful advice.

Credit check potential suppliers

It's always worth making sure your supplier has sufficiently strong cash flow to deliver what you want, when you need it. A credit check will also help reassure you that they won't go out of business when you need them most.

Price isn't everything

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Other factors are equally important when choosing a supplier - reliability and speed, for example. If you buy cheaply but persistently let down your customers as a result, they'll start to look elsewhere.

Agree on service levels before you start

It's a good idea to agree on service levels before you start trading so you know what to expect from your supplier - and they know what to expect from you.

Don't buy from too many suppliers...

It will be easier for you to manage - and probably more cost-effective - if you limit the number of sources you buy from. This is particularly the case with low value-added suppliers.

...but don't have just a single supplier

It's always worth having an alternative supply source ready to help in difficult times. This is particularly important with regard to suppliers strategic to your business' success.