Suppliers are people or organisations that provide a product or service to another business.
Finding a reliable and competitively priced supplier is vital to the success of your business.
The terms that you negotiate with your supplier need to be based on:
- the way that you pay them – how much, frequency and invoicing/payment procedures
- potential costs – administration, taxation, transport, reimbursable expenses
- possible risks – late payment to supplier, or faulty, late or undelivered goods
This guide explains how to build strong business relationships with your suppliers, through good negotiation, collaboration, management and performance review skills.
Get quality service from your suppliers
To ensure a productive working relationship, select suppliers who offer quality service and meet your specific needs.
Prior to engaging with a supplier, it can be difficult to know if they are able to provide the level of quality in their services that you may need. Using suppliers who have been referred from other businesses or people who you trust, or requesting trade referrals from the supplier, can help provide peace of mind.
Choose suppliers who can meet your specific needs. For example, if a faster turnaround is a priority for you, then there is no point in selecting on grounds of cost if the turnaround requirements cannot be met.
One way in which to formalise this is to draw up a service level agreement (SLA) between your business and your supplier. With SLAs you can agree on targets and specify performance standards that help to define and secure your business/supplier relationship. It will generally cover such issues as problem management, compensation, warranties and remedies, resolution of disputes and legal compliance. It can also be extremely useful if legal proceedings ensue.
Building good relationships with suppliers
It pays to invest time in building good relationships with your key suppliers. If you can save money or improve the quality of the goods or services you buy from your suppliers, your business stands to gain.
Tips on dealing with your suppliers:
Consider some of the following when working with your suppliers:
- Meet your contacts face-to-face or via Zoom and see how their business operates. Understanding how your supplier works give you a better sense of how it can benefit your business.
- Meet the people who will be managing your account and make sure they can be easily contacted.
- Ask about their plans for development or expansion. Will this affect the goods or services they are providing to you?
- Help your suppliers by submitting requests for goods or services in good time, being clear about deadlines and paying on time.
- Keep an eye open for any opportunities you can pass their way -in a good customer-supplier relationship they will do the same for you.
- Make your business important to your suppliers and they will work harder for you. Some suppliers may offer better deals if you promise to use them exclusively.
However, this may cause significant problems if they go out of business. Don’t ignore opportunities offered elsewhere. Keep your options open by monitoring the deals offered by other suppliers.
Consider whether a contract or a service level agreement (SLA) is necessary. This process will guard against complacency on the part of the supplier.
How you can help your key suppliers
It is in everyone’s interests that you do well out of key supplier relationships. Suppliers warrant careful attention, as their performance may be crucial to your business.
Here are some ways that you can help your key suppliers:
- Coordinate your production schedule with theirs.
- Discuss ways to reduce overall costs through the size or timing of orders/contracts.
- Consider additional products or services that your supplier could provide.
- Update them on strategic changes or new products early on – this helps them adapt to meet those changes.
- Analyse how well you forecast sales and plan to meet your supply needs. Sharing the results of this analysis with your suppliers will allow you to develop accurate sales plans and hone shared sales forecasts and schedules.
- Use a purchase order system to control and monitor the buying of goods and services from suppliers – this facilitates internal financial controls and prevents specification misunderstandings at the supplier’s end.
- Pay bills promptly. Paying late will strain your relationship with the supplier and could lead to less favourable terms in the future. Ideally you should have a payment policy that commits your business to paying undisputed bills on time – a copy should be sent to your suppliers.
There are many ways in which technology – especially Internet-based communications – can help you develop and maintain a good relationship with your suppliers.
Service level agreements
Service level agreements (SLAs) are agreements or contracts with suppliers that define the service they must provide and the level of service to be delivered, and which also set out responsibilities and priorities.
SLAs themselves are contractual obligations and are often built into a contract – in the form of one or more clauses or as an entire section. SLAs can be used in any supplier contract where a business’ ability to meet its customer or other business requirements is dependent on the supplier.
SLAs are complex documents that should be well defined and cannot be drawn up in an ad hoc fashion.
Drawing up an SLA
It is important that you are involved in drawing up the agreement together with the supplier.
Typical SLAs set out:
- the service being provided
- the standards of service
- the timetable for delivery
- response and resolution times
- any credits available for failure to meet service levels
- respective responsibilities of supplier and customer
- provisions for legal and regulatory compliance
- mechanisms for monitoring and reporting of service
- payment terms
- how disputes will be resolved
- confidentiality and non-disclosure provisions
- termination conditions
If suppliers fail to meet agreed levels of service, SLAs usually provide for compensation, commonly in the form of rebates on monthly service charges. When drawing up your SLA with your supplier, highlight the most critical components of the deal so you can apply the strictest penalties to these. Build periodic performance reviews into the SLA.
SLAs require constant discussion and updating. If the needs of your business change, you may require different performance criteria. Likewise improvements in technology should be taken into account when reviewing your SLA.
Ending supplier contracts
There are many reasons for terminating a contract with a supplier. They might consistently fail to provide you with services or goods that meet your requirements, or you may find a cheaper or more reliable supplier elsewhere, for example.
First check the contract to see whether there are penalties for terminating the deal early. Ideally, when drawing up the contract, you will have agreed an exit clause that minimises what you have to pay. Otherwise, the penalties may be such that you are effectively locked in with that supplier for a minimum term. If the quality and effectiveness of your supplier decreases, your business may suffer.
As well as financial barriers to changing suppliers, you will also face operational ones. There may be disruption to your business when you switch to a new supplier with different processes or systems.
Make sure that your existing supplier gives you all the information you need to make the transition smoother. If possible, negotiate so that your new supplier takes responsibility for handling the changeover process.
To avoid such problems you should think about the possible pitfalls of ending a contract early at the contract negotiation stage. For example, if the contract is for customised software, you should make sure that ownership of intellectual property is clearly defined at the outset.
You should consider seeking legal advice when drawing up important contracts. It is a good idea to have guidelines in place for dealing with ending a supplier contract and help you to avoid alienating a supplier you may need at a later date.
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