4 Key Criteria for Choosing the Right Vendor
The Search
Finding a vendor can be a difficult and long process. Putting the effort in to find and develop a strong vendor relationship will provide long-term benefits. There are several criteria for finding a good vendor that can be applied to any vendor and any business. Relationships are a critical aspect to small business success and relationships with vendors should be at the top of the list.
In the global marketplace, there are hundreds of options when searching for a vendor. There are great options locally as well as internationally. To find a good vendor it is important to concentrate on four key factors: cost, distance, customer service, and quality. Finding a vendor that can satisfy all four factors will provide a valuable ally in a competitive marketplace.
Cost
The first area of importance is cost. While the following three categories are presented in no particular order, cost should be the first concern. It is easy to identify a long list of vendors but narrowing the field can be difficult.
Cost constraints and buying power have a significant effect on the prices offered to small businesses. Most small businesses do not purchase the necessary volumes to receive reduced pricing. Large vendors will have high minimums and may require the purchase of quantities that are not feasible for small businesses. Focus on small and medium sized vendors in the beginning because they will provide competitive order quantities.
Create a list of all the potential vendors for each item. This will provide a method for tracking how each vendor performs. If possible, narrow the list by selecting vendors who can offer multiple items on the list. After compiling the vendor list, submit a quote request to each vendor for the items they manufacture. Include as much information as possible and send the exact same information to each vendor. All too often, different information is sent to different vendors and the resulting bids do not reflect a fair comparison.
Each bid may be formatted differently and some charges may be included in the per-piece rate while others are broken out as separate line items. Speak with the vendor to clarify the startup costs and the per piece rate of the item before comparing the bids.
Once the costs are clarified, highlight any vendor whose price is above the acceptable maximum price for the item. Contact those vendors and see if there is a possibility of getting a lower price. Provide them with a ballpark estimate of what the maximum price would have to be. Use the quotes from other vendors as a tool for identifying a reasonable range.
Negotiating with vendors can greatly reduce startup, shipping, and per-piece costs. Many vendors will take lower margins to gain long-term customers. Any vendor that does not submit a new bid at the lower price should be eliminated.
Every business is tempted to end the vendor selection process at this point. Choosing the lowest bid and working with a company based solely on price is shortsighted. There can be hidden pitfalls when dealing with a low-cost vendor. Take the next steps to evaluate any vendor thoroughly before making a decision.
Distance
The next step is to evaluate each vendor on less tangible criteria. The physical distance from a vendor will have several effects on the relationship. A vendor that is more distant will cost more in shipping, they will visit less often, and it will be harder to get to know more about them.
One of the critical aspects to creating an effective vendor partnership is developing relationships beyond the buyer. This includes meeting with other staff at the vendor’s site and taking a plant tour. A vendor that is further away will be more opaque. Take the time to visit the plant. A lot can be learned about a vendor based on how they treat their employees and the state of their facility.
Site Visit
Vendors with clean plants and happy employees tend to provide better service to their customers. A messy, hectic plant speaks to potential issues in on-time shipping. It can also highlight the quality control standards of the vendor. A vendor with low quality standards in-house will likely provide a lower quality product.
Distance also comes into play when issues occur with deliveries or quality. Vendors should be considered partners in quality control. It is difficult to work with a vendor on quality if they are on the other side of the country or the world. Product can also be delayed in customs or due to weather. The further a vendor is the more opportunities for delays in shipping.
International vendors are the most difficult to judge due to the distance. If the vendor is providing an item that is critical, there is good cause to spend the money to visit the vendor’s facility. Shipping can play a significant role in doing business with international vendors. The cost of the shipment as well as the costs associated with importing the goods should be considered before choosing an international vendor. The capital costs and per-piece rates may be lower but after all the additional shipping costs are calculated the long-term costs may be greater with an international vendor.
When evaluating distance, it is possible to eliminate vendors from the list of possibilities. If the distance creates shipping costs that push the per-piece rate above the agreed upon level, check if the vendor is willing to negotiate shipping. If the effect of the shipping costs cannot be reduced, eliminate those vendors.
During an onsite visit with a vendor, if there are any red flags, bring them up with the sales representative. If these issues cannot be mitigated to your satisfaction remove that vendor from the short list.
Customer Service
A vendor relationship is much like any customer relationship. There are vendors that provide great customer service and there are vendors that do not. Like distance, the customer service a vendor provides can have hidden costs. It is important to look at a vendor relationship like a partnership. The amount of money changing hands and the duration of the relationship is greater than a normal customer relationship.
One way to judge the customer service offered by a vendor is to contact other customers. Ask the vendor for references or the names of other customer they have done business with. Contacting other customers to get a better understanding of the vendor can be critical in identifying red flags. If other customers have had bad experiences, those should be taken into consideration before deciding on a vendor.
Like any business relationship, shared values are key. Identify vendors that share core values of your business. This will provide a good staring place for the relationship and will facilitate mutual trust. Core values should include a commitment to employees and quality. A site tour will help to identify vendors with shared values.
Identify those vendors that provide good customer service and have shared values. Eliminate the rest. A vendor with bad customer service will cost more to do business with in the long run. More time will be spent on calls to the vendor to identify issues and get resolutions.
Quality
The first step in creating a good quality product is to get quality components. The need for good components gives vendors a lot of control over the final quality of a product. Vendors that can provide the best quality component should be at the top of the list.
Evaluating the quality of items that a vendor produces can be difficult if they are creating custom parts. Asking for examples of previous work and contacting a vendor’s current customers will provide insight into the vendor’s quality. During the quoting process, asking for a sample of the item they are producing.
The most important part of determining quality is ensuring that quality standards are shared with the vendor. A vendor will provide feedback based on the quality requested. If the vendor is unable or unwilling to meet the quality standards, then they should be removed from the list of vendors. Once a vendor with acceptable quality is chosen, it is important to perform a site visit to ensure that quality standards are met.
Final Decision
Based on all of the information gathered above, choose a vendor that fits all of the criteria. If there are multiple vendors that have the desired characteristics, personal choice is always a good way to determine a tie. This is a long-term relationship and it is important to choose a partner who you enjoy working with.
Now that the final decision is made the job is not over. As your company grows and the marketplace evolves, it is important to continue to evaluate vendors. Some vendors may be forced to implement price increases. Internal changes may affect quality or customer service. Continue to evaluate vendors to ensure that the correct partner is providing critical parts.
Developing a second vendor for every part is a good way to reduce risk. If a change occurs at the preferred vendor, switching will be easier if another vendor has already been vetted. Keeping purchasing options open also creates a competitive environment that helps to keep costs low.
A vendor relationship is a long-term commitment and finding the correct partner will keep costs low. There are more costs to doing business with a vendor then those associated with a quote. Look beyond the pricing to understand the hidden costs of doing business with a vendor. Choosing the correct vendor to start will save money and time in the future.
