Managing supplier relationships

Where do you get your supplies and how secure are they? The success of your business depends on a reliable supply chain - and that depends on having strong relationships with your suppliers. Here are some tips to help.

A few major suppliers are likely to be critical to your business. For example, if you’re planning to start a manufacturing business, you’ll need supplies of raw materials. If you are a retailer, you’ll need suppliers or wholesalers to stock your shelves with products. If you’re starting a service business, you may need to draw on the resources and skills of others to complete your projects.

But it’s important to think more widely, because behind most businesses there is a whole web of suppliers. For instance, suppliers could include:

• The telco company you use for landlines and smartphones and internet services.
• Digital providers, such as website designers and any experts you use to maintain and update your site.
• Printers and suppliers of office stationery and other products.
• Suppliers of packaging material for your product or service.
• Suppliers of courier, transport and shipping services for incoming materials and outgoing deliveries to customers.
• Any other suppliers specific to your type of business.

Once you’ve identified your suppliers, make a list of the top five or ten and then consider these questions:

• Can you rely on key suppliers to supply consistent quality goods or services on time?
• What could disrupt their supplies or services? Think of issues such as strikes (both here and overseas), poor management, natural disasters or economic slumps.
• Can you rely on them if their supplies are limited and in hot demand, or will they give preference to larger companies or longer-established customers?
• Can they keep pace with your growth? If you suddenly got an order for a container load of products on a tight delivery schedule, would your main supplier have the capacity to meet the deadline?

For your key suppliers you should:

• Run a credit check if necessary to make sure their business is solid. The last thing you need is for a supplier to go under while you are waiting for critical supplies.
• Never take a supplier’s capacity for granted. Check with your supply chain first if you suddenly win a large order with tight delivery times - they may be flat out on other work and as a result you may end up paying late delivery penalties and losing the goodwill of the customer.
• Consider contracts with key suppliers if this is the best way to secure supplies or avoid volatile prices. Always run the contract past your lawyer before you sign to check that the terms are fair. Avoid getting locked into long-term contracts, such as cell phone contracts, that could lock you out of lower rates that may later emerge.
• Meet with your advisers to consider what is critical to your business and how else you can guarantee secure supplies.

Develop a ‘Plan B’ supply chain so your business isn’t disrupted if something happens with a key supplier:

• Search the internet for backup suppliers who can provide a similar standard. Get samples to confirm they can match the quality of existing supplies.
• Get quotes or tenders for supplies such as insurance, telecommunications, power and other utilities (you can use your pricing research in negotiations with existing suppliers).
• If you use ‘cloud services’ for accounting or other supplies, make sure you have backups so you can recover the data if necessary and continue operating.

A good relationship with suppliers is just as important as managing your debtors well. Build a good credit history with suppliers by paying bills on time – it builds up goodwill which can pay off in tough periods. Some tips:

• Next week you’ll work through creating a cash flow forecast for your business. You’ll ensure that your business will have the cash available to pay supplier bills on time.
• If you foresee a problem in paying a bill, approach suppliers as early as possible. They are more likely to accept an arrangement if you are open and honest about a cash-tight situation.
• Once you build a good relationship, chat to suppliers about what is happening in your industry. They may know of important developments and opportunities, such a competitor’s plans to expand or perhaps to close down.

It may pay you to use contractors rather than undertake certain work in-house. This option can cut down on funding and staffing requirements in your new business and save you from having to buy assets that won’t be used all the time. Some examples:

• Contracting out part or all of a manufacturing process could save having to buy expensive machinery.
• Contracting out bookkeeping and payroll functions may make better sense than hiring a bookkeeper or accountant.
• Contracting out specialist tasks such as graphic design, software coding or other service tasks could save the cost of developing the skills in-house.

Weigh the advantages of contracting out against the disadvantages. Contracting out may mean your business remains dependent on subcontractors and never acquires the skills or capacity to complete the work in-house. You may also have less management flexibility and control over the work.

On the other hand, in addition to cost saving, contracting out can enable you to undertake work or projects that are otherwise beyond the resources of your business.