When running a company, it is vital to understand all factors affecting inventory management, which includes suppliers and the dependence of the company on them. Without product supply, the company cannot provide for their own customer’s needs which essentially jeopardises profits and survival. However, it is not just the act of being able to supply a product that makes a supplier suitable. Freight options, location, price, availability, approachability, financial stability and consistency of supply are just a few things that should be considered when choosing a supplier.
Trade-offs of suitability
Price is an important component to consider when qualifying a supplier. It is only natural to seek out the most cost-effective supplier with the lowest ordering cost. However, this needs to be considered in conjunction with a few other things namely the ability of the supplier to supply product consistently and of a high standard. Though price is important, a reliable supplier who does not place you in a difficult position with your customers is worth their weight in gold.
Freight can often form a significant proportion of the order cost of a product and so if it is not recouped in the price you are able to on-sell the product for, the company will make less profit. Therefore, it is very important to consider suppliers who provide reasonable freight options (which may be linked to purchase quantities). Likewise, it is advised to watch out for suppliers who artificially raise freight costs to make a profit on freight. Though underhanded, this strategy works, however it is at the disadvantage of the buyer.
However, despite the need for cost-effective freight options to preserve profits, it should be balanced appropriately with freight times. The company’s own customer satisfaction is paramount and as such, it may be in the company’s better interests to employ the use of a more expensive freight option for the certainty of timely delivery.
Location of suppliers
The location of the supplier is important to note as suppliers who are located geographically closer may be able to ensure consistency of supply a lot better than those who have a variety of shipping modes to get the freight to you. Likewise, the increase in freight and carbon miles connected to the product can result in higher ordering costs. Therefore, a local supplier may be more cost effective in addition to being superior in reliability.
It is important to be concerned with the manner of the supplier and their willingness and availability to foot queries and problems. A supplier who is happy to work with you for a solution and who is genuinely concerned with any problem or difficulty you may face is one worthy of your business. If it is difficult to get hold of a supplier, then going forward, they may be difficult to do business with and may even prove untrustworthy. A supplier should be someone you seek to form a healthy business relationship with based on all the attributes life relationships should reflect: trust, reliability, good communication and care.
This may not be something that immediately comes to mind as a consideration when selecting suppliers however, it is of the utmost importance. If a supplier is financially unstable and you have paid them money for a service or product not yet physically delivered or achieved, then your company may be placed in jeopardy.
Overall picture of supply
We have discussed some specific things to consider when selecting suppliers however it is also important to consider the overall supply pool. Even if the company has found the perfect supplier at the right price and in a close location, they should still approve a backup supplier should anything compromise supply from the first. It can be tempting to have a large pool of suppliers however it is about striking a healthy balance. It is important to have back up, however it is just as important to have the capacity to establish a strong working relationship with your suppliers (a by-product of this is loyalty and higher probability of guaranteed supply). With a smaller pool of suppliers, the company is able to take the time to establish a rapport and subsequent rewards for loyalty which ensures a mutually beneficial relationship. With a smaller pool of suppliers with whom you may be more loyal, there is a greater chance of loyalty rewards and lower ordering costs.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.