DeltaBid welcomes this guest post from Tony Noe, an experienced procurement/supply chain professional. He describes the first step to building a strong supply chain: selecting the right supplier.
Strong Suppliers = Strong Foundation
Whenever you attempt to build anything, from a LEGO tower, to a reputation or a solid, risk-constrained supply chain, you must start with a solid foundation.
My belief after years of experience is that the foundation is laid down and established during the initial sourcing process. If the supplier selected to provide the service, product or logistics is not someone with whom you've had years of experience or you're not sure that they can deliver exactly what you asked for and expect, then you must take the time to examine them completely and thoroughly to assure there are either no, little or manageable risks doing business with them. So the question we have to answer is simply, how do we check them out?
Identify Your 'A' Items First
Clearly not everything you buy requires full due diligence, but your ‘A’ items certainly do. No matter how you classify your spending — by dollars, by volume, criticality in your process, as a critical service to complete your process or a dart board — you know who the key suppliers are or what the key items are: they are the ones that determine if you keep your job. Run out of one of these and you will know quickly, it was an ‘A’ item.
Once you know what the key items are, ask yourself how many suppliers provide these items. All of us hear the 80/20 rule talked about. The normal or average distribution in many companies is that 80% of dollars are spent with 20% of the supplier base. Does that hold true in your company? If not, perhaps you have a product with which to re-evaluate your sourcing strategy. Use leverage of more business to get better pricing from fewer suppliers that you already know and have history with.
What to Consider During Supplier Evaluation
With new items to source of a new supplier to evaluate if you wish to do business with, here are some critical items to check out:
- Capacity — Do they have excess capacity, enough to handle your volume, and if so, why? Did they lose a large customer, or did they build capacity with a plan to grow? Either way, you need to know that answer.
- Service history — References are great, but always remember they are not going to provide any reference that says they are bad, so do some research on your own. What do they sell? Do you know others that might also but that? Have they ever heard of, or used the new supplier?
- Financial status — For publically traded companies, review their 10K and annual reports, which are usually available online or at a public library. For privately held ones, it's a little harder. Ask for some financial data (that you will keep confidential), get a B&D report on them, or ask for a letter from their bank concerning line of credit. These can be good indicators.
- Leadership stability — Are the leaders there to stay? Have they been there long enough to make a difference? Are they going to be there long enough to make a difference? All key points, as many great companies were or are great because the right people are in leadership positions.
But the single most important thing to do is go see the supplier at his/her place. Look it over. Does it look like a company you want to deal with, one that can and will step up to meet your needs when the going gets rough? Is there room to grow, or are they going to have to build if you want to grow?
Ask these questions, and know the answers very well before you put your supply lines at risk.
About the author: Tony Noe, CPSM, CPSD, C.P.M., CIRM
Tony has been a procurement/supply chain management professional since 1971. He has been working as a consultant since 2010. During his career, he has traveled to four continents in search of low cost, better quality sources. An active member of ISM, he has spoken at their international conference several times and written articles for their publication, Inside Supply Management. He has also served as the chair of ISM’s Materials Management Group and Global Group. Tony is currently serving on the committees for ISM’s Supplier Management and Risk Management groups. In his free time, Tony enjoys “purchasing” golf (low per stroke average cost).
Tony welcomes connections via LinkedIn.