Evaluating prospective long-term supply partners

January 13, 2015

Contract imageWhile a company may have a definite idea about the specific benefits that it is looking to achieve in establishing a long-term supply relationship, the ultimate success of the arrangement will depend on the chosen supplier and its performance under the contract. Accordingly, it is essential for the company to conduct a thorough and complete evaluation of potential suppliers. As with any other important business partner, selection of a key supplier should always be preceded by an intensive due diligence review, including meetings with the supplier’s key personnel, visits to the supplier’s facilities and interviews with other customers of the supplier. Among the issues and concerns that should be evaluated before a contract is signed are the following:

  • What interest does the supplier vendor have in developing a lasting partnership? Potential partners generally will be willing to share long-term plans and provide information on product costs. Senior management involvement is also a strong sign the supplier is willing to consider a special relationship.
  • What has been the supplier’s historical delivery performance? Delivery performance is generally measured as a percentage of on-time delivery against agreed delivery dates.
  • How do the supplier’s prices compare to competitors? While the days of pure price competition through bidding have largely passed, except in the case of small orders for generic products, price is still an important selection factor. Preference should be given to suppliers that consistently are willing to match or beat the lowest price available in the market for comparable goods and delivery terms.
  • What cost saving initiatives have been adopted by the supplier? Attractive partners will share information on plans and strategies that are used to reduce production costs and corresponding prices to customers. Long-term partnerships should involve constant communications on cost saving ideas.
  • How has the purchaser used technology in its operations? The technological competence of the supplier should be carefully investigated, particularly the supplier’s track record with respect to meeting the expectation of customers with respect to quality and performance of the supplier’s products. If possible, the company should interview the managers and engineers from the supplier who will be involved in the company’s projects.
  • What are the supplier’s requirements with respect to lead times for placement of orders? Some companies are unwilling to agree on short lead times or provide flexibility for customers to adjust their orders. Other companies offer lead times that are consistently less than competitors and are willing to respond to unforeseen deadlines. The company should also determine if the supplier would be able and willing to work with the company to develop “just in time” capabilities and respond quickly to order queries and problems.
  • What has been the supplier’s historical performance with respect to the quality of delivered products? Poor partnering candidates consistently deliver orders that have a material level of defects. On the other hand, other companies will meet or exceed performance expectations and will take steps to insure that defects are not repeated.
  • What is the quality of the supplier’s customer service and support function? While some companies offer little or no help with customer problems, potential partners will be eager to provide immediate investigation and take all necessary steps to correct problems and provide suitable compensation.
  • What is the quality of the supplier’s delivery documentation? Supply partners should be able and willing to provide comprehensive and accurate delivery documentation customized to the needs of the customer, including lot numbers and weights.
  • What is the quality of service provided by the supplier’s account representatives? In some cases, account representatives fail to make regular contact with the customer and invest the time necessary to understand the customer’s needs. On the other hand, prospective partners will train their representatives to be well informed, easily available and empowered to enable the supplier to meet its obligations.

In addition, the overall business and financial condition of the supplier should also be considered, particularly when a long-term relationship is contemplated. The company must have a comfort level that the supplier will be able to continue in business for the duration of the contract and fulfil its obligations to the company.  For a checklist of matters to consider in vetting and selection suppliers, see §82:163.  You should also review other useful checklists that should be part of your tool kit for assisting the purchasing function include a checklists covering matters to consider with respect to supply chain management (§82:162), structuring and documenting supplier relationships (§82:164), designing training programs for the procurement function (§82:165) and  monitoring and evaluating supply partners (§82:166).  To learn more about helping your clients in the purchasing area also see the following:

  • Business Counselor’s Guide to Organizing and Managing the Purchasing Function (§82:170)
  • Business Counselor’s Guide to the Order and Fulfillment Process (§82:171)
  • Business Counselor’s Guide to Supplier Management (§82:172)
  • Business Counselor’s Guide to Auditing the Purchasing Function (§82:173)