A Forbes study found that “most manufacturing companies could significantly grow their profits by strengthening their supplier relations”. A good supplier relationship is critical in any industry, but especially in manufacturing. Evaluating a good supplier goes far beyond a quick glance at how much they are charging you. Here’s a look at how you should evaluate each supplier.
What to Look For
- Price is always what comes to mind first when manufacturers look at suppliers. If competing suppliers come in with significantly lower prices, it’s time to investigate. Don’t be afraid to ask your supplier about the price discrepancies. However, remember the “cost of doing business” with a supplier involves more than the invoice amount. Does every order require negotiation for a decent price? How often are employees having to deal with damaged or low quality materials? Are late deliveries slowing production? Even if the invoice price is great, the company may be losing money in staff time, lost productivity and upset customers.
- The supplier’s reliability directly affects how your customers view your reliability. Quick delivery helps minimize the amount of inventory you must keep on hand, resulting in less risk of ending up with obsolete materials and lower cash needs. Don’t automatically assume larger suppliers have the most resources and best reliability. Smaller companies highly value consistent clients. Look for smaller companies within your geographic area. These often provide competitive pricing, higher reliability and minimal freight charges.
- Is your supplier innovative? An effective supplier should contribute to new product development as much or more so than your own team. Their role is to be cutting edge in whatever product or material they are offering you. Does your supplier stay up-to-date on industry trends? Do they understand your needs so much that they bring new ideas to you or can tweak your creative team’s ideas? Look for suppliers that offer the latest, most advanced products.
How to Gather Data
Evaluating suppliers should be part of a company’s strategic plan, and it must be done at regular intervals. Take a hard look at how often shipments are late, damaged or incorrect. How quickly do they respond to your purchase orders? Gathering and tracking this data doesn’t need to be a cumbersome administrative task. Automating your purchase order process with a system such as SourceDay allows for automated supplier grading, a real-time scorecard. Suppliers are evaluated with letter grades in each of these categories:
- On time Performance
- Good Parts Received Quality Rating
- Price Variance over time
- Responsiveness to acknowledgements and status updates
Should You Make a Change?
Armed with tangible data from the supplier scorecard, your manufacturing company is in a great bargaining position. You have concrete data about the supplier’s price variance, timeliness and responsiveness. Your supplier may be shocked when they realize how low their score is. Should you give them another chance? That’s for your strategic team to decide. It is worth considering. A low score may bring to light issues the supplier did not know were so severe. They may be willing to offer you a discount to give them another chance. Working with a supplier through a difficult time may also instill loyalty, making the supplier more likely to lend you a hand during a future cash crisis. However, if the supplier does not respond apologetically to your scorecard data, or it’s clear you have outgrown their capabilities, it’s time to make a change.
The study mentioned at the outset was unique because it evaluated “soft” benefits, supplier relationships that go beyond the price tag. Researchers noted the economic value of a supplier’s non-price benefits. Keep tabs on both the price and non-price benefits through automated supplier grading. Contact us to learn more.