Selecting the right supplier has a far-reaching impact. Aside from costs, selecting the supplier has an impact on the supply chain.
Choosing the right supplier or vendor for your company can be difficult, especially if a large portion of your product is supplied by a single company. However, selecting the right supplier has a far-reaching impact, from supply chain, product quality, and client satisfaction and ultimate growth of your business.
If you are just starting out, you should think about whether you need a supplier or if there are some things you can do on your own. Vertical integration occurs when you choose to manufacture your own products or service. Vertical integration makes sense if you can produce a product at a lower cost and/or higher quality than a supplier. This obviously depends on the industry you work in and the products you offer. However, if you're familiar with Henry Ford and the benefits of the assembly line, you'll recognize the value of specialization. Even if you can produce the product yourself at a lower cost, your business will suffer if customers do not receive the quality for which they pay.
If vertical integration is not an option, there are a few things to think about before selecting a supplier.
Price is the most obvious factor to consider when selecting a supplier, and it may appear to be the most important. A company will typically do everything possible to increase margins, including controlling raw material costs. However, as previously stated, if you cut costs too drastically and sacrifice quality, your long-term business will suffer. The most important thing to remember is to conduct thorough research. Call several suppliers, obtain price quotes, consider reputation, request references, and be aware of what you're getting into.
It is also critical to consider the supplier structure in your industry. If you are the sole buyer, for example, with several suppliers, you can demand lower prices and exert more control. The inverse is also true: if you have one supplier and several buyers, they set the terms and you become a price taker. Remember that if buyers put too much downward pressure on prices, something will suffer.
This could be the most important factor. Without it, neither company will be able to reach its full potential. Trust can be difficult to establish, especially if you are sourcing from another country and are unfamiliar with the laws, customs, and culture. Language, for example, can be an important factor in and of itself. It can be dangerous if you can't call your supplier and have a direct conversation when you need to. Buying from a warehouse in Thailand or China is often far more cost effective. However, few people understand the language, and unless your supplier speaks English, communication issues may make things more difficult in the long run.
Having an equity position is another thing that can help with trust. Many large retailers own substantial stakes in their suppliers, which naturally aligns incentives.
A few years ago, I had a client who had three main suppliers. I'll refer to them as A, B, and C. They had been working with A for 15 years when they decided to discontinue supplying a portion of their products to my client. Over a 15-year period, firm A's key decision makers only visited my client a few times and rarely made an effort to work with them. Meanwhile, B and C had been in close contact with them, investigating how my client sold, who their customers were, their core values, and so on. One of them even hired an outside consulting firm to figure out ways they could grow together. The purpose of this example was to emphasize the significance of this relationship and the impact it can have on your business. A good supplier recognizes that your businesses must grow together.
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