A Definitive Guide to Purchasing and Supplier Relationship Management That Will Save Your Business Money

Taking charge of your purchasing and supplier relationships will see an improvement in your bottom line, an increase in profit, and an ability to keep prices competitive.

In a market that more often than not sees suppliers in the power play, businesses need to be smart about their operating costs. This calls for a strategic and well thought out purchasing management program.

This guide will take you through the steps to setting up a formal purchasing system as well as how to pick the best suppliers for your business’ needs, and how to manage those relationships.

Finally, it will discuss how group buying can help leverage the market to shift power back into the hands of your business away from the suppliers.

“A dollar gained in revenue is a very good thing assuming it leverages the current cost structure. But remember, only a small portion reaches earnings. A dollar saved from cost, however, goes directly to the bottom line. So while focusing on the top-line, don’t forget to engage in a systematic approach to governing costs as a way to ensure long-term value creation.” - Steve Odland, Forbes Magazine

COVERING THE BASICS

At its very basic definition, purchasing is buying goods and services that your businesses uses as part of its operations.

For this reason, purchasing spans a wide divide between strategic and non-strategic purchases. It is also why it can be a very easy place for cracks to appear and businesses to fall back on unstructured purchasing, simply buying products at the time it is needed, instead of planning in advance.

WHAT IS THE DIFFERENCE BETWEEN A STRATEGIC AND A NON-STRATEGIC SUPPLIER?

WHEN CAN PROBLEMS ARISE AND HOW DO I MAKE WISE PURCHASE DECISIONS?

Problems arise for companies however who neglect to take care of their non-strategic purchasing. It is all well and good to have a formal purchasing system in place to ensure your company will never run of timber, but, when you purchase low-value supplies without any structure, they can drive up business costs extremely quickly.

The good news is that these costs can easily be rectified and a business can quickly see savings come through by formalising the process of purchasing non-strategic supplies.

Wise purchasing is characterised by buying the correct quantity and quality of products or services at the right time with the best possible price from the supplier.

Sounds like a tricky balancing act, but with a little planning and organisation, it is possible to always purchase smartly for any business.

When you have purchasing managed and under control, you will not only improve your bottom line for the business, but there will be a lift in overall efficiency for the process.

ENSURE YOU HAVE BEST PRACTICE PRINCIPLES IN PLACE

The Purchasing Policy ensures you have a best practice method for following a code of conduct and order around your business’ purchasing behaviour.

GET STARTED NOW USING OUR PURCHASING POLICY CHECKLIST:

• Who can make purchases for the business?
• What items is the nominated person allowed to purchase?
• Will a Purchase Order be required?
• Do you have an outline of categories of products for strategic and non-strategic spend?
• What are your spending limitations? (This can be broken down by category, as well as an overall budget for spending limits.)
• Did you outline what criteria are used to determine the appropriate supplier to use for a particular purchasing need?
• Include a clause that outlines the company’s policy on gifts.
• Outline what information is considered confidential to the company.
• Make a list of the types of contracts the company is willing to enter into with suppliers and the length of time these contracts may last.
• Outline a procedure for dealing with any legal questions or processes.

PURCHASING MANAGEMENT

Streamline the amount of work and hours spent on making each purchasing decision, for your business to see an overall improvement in the efficiency of operations, drive down costs and increase your bottom line.

The following four items are the considerations you need to use to make a decision on where items fall along the line of priority. By organising this early on you will save time as you won’t need to go back later and make changes, or realise that you have spent several days deciding on how often to order milk.

UNIT COST

Devote the most time and attention to your most expensive purchases or to products you will sell for the highest price.

EXTENDED COST

Give high priority to low-cost units that are purchased in a high and regular volume or products that you sell in a high volume at lower prices.

LEAD TIME

Place into consideration how much time and attention should be given to items that take longer to receive.

SHIPMENT REJECTION

Flag high priority to any items that run the risk of being rejected upon arrival as this can slow down your ability to use or sell the product, which may have severe implication on your business operations.

YOUR PURCHASING MANAGER

You may decide you need to hire a purchasing manager or you may be able to introduce the responsibilities of purchasing to an individual within your current organisation’s structure.

They will need to check the quality of all incoming goods and work alongside your accounts team to ensure all invoices are paid in a timely manner.

Depending on the size of your business you may wish to dedicate a resource to be the purchasing manager, for example, someone in accounts or finance.

HERE IS A SHORT CHECKLIST OF QUESTIONS TO DETERMINE THE LEVEL OF RESOURCE PURCHASING NEEDS IN YOUR ORGANISATION:

• Does your business send out RFQs (Requests for Quotes) before making purchases? 
• Does your business negotiate contracts with suppliers? 
• Are you tracking the performance on your suppliers and marking them against difference criteria? Eg. Quality of product, reliability, delivery time. 
• What level of experience and specialised knowledge does your business require when working with your strategic and non-strategic suppliers? 
• Does the value of your company’s brand rely heavily on the quality of materials you purchase for producing goods to sell? 

THE ORDERING SYSTEM

By following an ordering system, your business can improve its efficiency and management of cash flow, maintain control over inventory, follow a purchasing schedule based on demand for goods, help improve your supplier relationships, and ultimately increase company profitability by improving the bottom line of your business.

Purchase Orders help small business keep track of expenditure and allow your purchasing department to cross-check with suppliers that they have delivered all the correct goods and in the right quantities. They are able to be used as evidence in the unfortunate event of legal disputes between your organisation and a supplier.

HERE IS A QUICK CHECKLIST OF EVERYTHING YOU NEED ON A BASIC PURCHASE ORDER:

• Your company details: name, address, telephone, fax, and logo.
• Type of product or service ordered
• Quantity
• Price
• Delivery terms
• Additional information space

You will need to give one to the supplier, keep an internal purchase order on file, and also submit a copy of it to your account department.

Chapter Two: Searching for Suppliers

The groundwork you do to set up a well-run purchasing management system in your business can be completely undone by using the wrong suppliers for your business needs or by entering into bad supplier relationships.

Once you have entered into a relationship with a supplier, do not consider this is a done deal. By keeping on top of new suppliers and looking for better matches and offers, you will be able to keep improving the expenditures for the business over time.

HERE IS A STARTING POINT OF SOURCES YOU COULD CONSULT DURING YOUR SEARCH PROCESS:

• Online
• Buying groups and their partners
• Word of mouth referrals
  
• Business directory
• Business newspapers and magazines
• Industry-specific publications

DETERMINING HOW MANY SUPPLIERS YOU NEED

How many suppliers you need will depend on the number of different products you require, but as the old proverb goes, “don’t put all your eggs in one basket”.

Even if you are able to find one supplier that can meet your purchasing requirements, it is unwise to solely rely on them for your business needs, even if they make themselves available at a great price. There is more to consider.

If you choose to trade with only one supplier, this can find your business coming up short if anything were to happen to them, or if they stopped delivering a quality product.

Keep your options open, be on good terms with several suppliers, and try to use suppliers that specialise in their product rather than one that stocks pretty much an assortment of everything. You may find that quality is lacking if their production is too diverse!

Find a supplier for each different category of products or services you require, and then maintain a cordial relationship with a secondary supplier as a back-up if anything were to go wrong with your primary supplier.

This applies in particular to your non-strategic spend lower cost per unit products that may have a few different substitutes available in the marketplace.

EVALUATING YOUR POTENTIAL SUPPLIERS

Evaluation of your suppliers will be an ongoing process, but in the search phase, it is especially important to thoroughly evaluate each supplier before deciding to make any purchases through them.

Your most important evaluation criteria will depend on how closely that supplier can offer products or services that match the individual needs and demands of your business.

WHAT EXACTLY ARE YOUR UNIQUE NEEDS?

From there you have base criteria to continually refer to and compare each supplier and what they can provide for you against.

Keep at the forefront of your mind what your business objectives are as a result of making this purchase. You must look beyond the sales pitch that the supplier will give you. If their pitch doesn’t align with your needs, then they are unlikely to be the right fit. Other times you will have to compromise between your needs to find a supplier that meets you in the middle.

Only you can know exactly what your business needs and values as the most important priorities. Don’t bend to the supplier’s idea of what those needs are.

Stick to them and you will eventually find the relationship that meets what you need.

CHECKLIST TO EVALUATE YOUR SUPPLIERS BY:

• ReliabilityQuality of items / products / service
• Value for money
• Customer service: helpfulness, response time, clear communication, friendly, expertise
• Financially secure: how stable is this business? If the supplier goes out of business, that could have detrimental effects on your company, especially if they are a strategic supplier partner
• Delivery times
• Competitive pricingSustainability / environmentally friendly
• Corporate social responsibility policies / ethical
• Ability to customise orders / provide personalisation

Remember, this is a general starting point, some of these will stand out as being more important to you than others. It is crucial to recognise which ones you are willing and not willing to compromise on for the overall benefit of achieving your business objectives.

YOUR STEP BY STEP PROCESS TO SELECTION

Create a targeted shortlist of suppliers that may fulfil your needs and are likely to be successful candidates, then create a worksheet by which you can individually compare and contrast each supplier by how well they fit your needs and where they may be lacking. This can help you find the best match for your business in a clear and efficient manner.

WE RECOMMEND FOLLOWING THE NEXT STEPS TO MOVE FORWARD WITH YOUR SHORTLISTED SUPPLIERS:

Approach your shortlisted suppliers. Start the conversation by asking for quotes, demonstrations or samples.

Compile the information you receive from your shortlist, then evaluate them. Compare prices, sample products, or demonstrations against each of your frontrunners for selection.

Do your homework. Find out if the suppliers are outsourcing any aspect of their work. If they are outsourcing anything, you will need to conduct research in that company as well, otherwise, you may face complications further down the road if things in their relationship go wrong.

HOW TO KNOW YOU MADE THE RIGHT CHOICE

Once you have made a decision and chosen suppliers you would like to enter into a relationship with, complete this final checklist to give yourself added confidence that you have made the right decision and haven’t rushed or skipped steps to choosing the supplier.

When you can check off this list, you’re ready to enter the negotiation stage.

DID YOU COMPLETE THE FOLLOWING:

1. Spend an adequate amount of time on research dependant on how high or low priority the supplier’s category will be
2. Checked their reputation in the market place by asking contacts about their experience with this supplier or if they have heard of them before
3. Conducted a credit check to ensure they are financially secure

Chapter Three: The Negotiation Strategy

KNOW YOUR NEGOTIATING OBJECTIVES FIRST

If you’re sourcing new suppliers to use for your business, you will always come up against the process of negotiating the terms of your contract with that supplier.

At this stage of the game, you will be already fairly committed to the prospect of working with them, so be prepared for this step in the process to take a decent chunk of time to reach an agreement.

Your first move is to do your research and ensure you are prepared for the negotiation process.

If you go into negotiations without having your homework done, you will inevitably come up short and walk away scratching your head, while the supplier is feeling pretty jolly.

NEGOTIATION OBJECTIVES CHECKLIST:

1. Price
2. Delivery
3. Payment Terms
4. Maintenance Agreements
5. Customer Service
6. QualityOngoing Costs / Extended Costs or Lifetime Costs of products or services
7. Value for Money

You have to be willing to accept before entering the negotiation process that it is unlikely you will get your ideal outcome on every objective, but when you are able to strike a balance with the supplier, that sees both parties getting some of their ideal outcomes, you will enter into a healthier relationship.

It is a very big risk to negotiate too fiercely, achieve what you want, but suffer from an ongoing negative relationship.

Good will can pay out in the long term from a supplier if they like working with you and want to keep you on as a loyal customer.

When you have your set list of objectives, prioritise them. Define the ones you are not willing to compromise on and others where you have room to give a little bit.

ASSEMBLING YOUR NEGOTIATING TEAM

The people from your business that will be taking part in the negotiating process need to be carefully considered.

Brief everyone on the strategy before you meet with suppliers.

You will also need to ensure that your negotiating team will match the seniority of the suppliers or else you will find yourself in a weaker position straight off the bat.

DEVELOPING YOUR NEGOTIATING STRATEGY

Have your negotiating strategy outlined and shared with everyone on your team that will be present for the negotiating process.

This ensures you are all working together on the same page toward a common goal for the company.

YPlan your strategy in writing, along with your strengths and weaknesses.

Do the same from the perspective of a supplier, if you can anticipate what their offer is, you have time to plan in advance a counter-offer as well as deciding on what points you would be willing to concede.

CONDUCTING NEGOTIATIONS

Not everyone finds it natural to negotiate, if anything, mostly everyone finds it to be a difficult, challenging, and at times, stressful experience.

We have written an article on how to smoothly sail through negotiations like a champion, How to be a natural at negotiating.

HERE ARE OUR KEY POINTS TO REMEMBER:

• Listen carefully, and try to not be the first person to break any points of silence in the conversation.
• Be upfront about the aspects of the deal you are happy with, ask the supplier to do the same.
• Don’t reveal your position or concede too early to any demands, this opens the doors for the supplier to take more and give less.
• Set out key points of the agreed deal in writing to keep track of the negotiation process.
• Approach the negotiating experience in a positive manner, be friendly to reduce tension between the two sides.
• Make sure that both sides have reached an agreement and are satisfied with what is being negotiated. It will be in your best interest to compromise a little bit more to maintain goodwill and know that the other party is satisfied. 

BE ALERT AND ON THE LOOKOUT FOR “NEGOTIATING TACTICS”

If you’re able to recognise these, you are less likely to bow under the pressure of them.

DON’T FORGET THE BACKGROUND CHECK

This one is more of a precaution, but still an essential part of the process. Do not sign a formal contract until you have run a background check. You must conduct due diligence before entering an agreement. Otherwise, the consequences of skipping this step will be to your own detriment.

Be Aware of the following during this process:

If a supplier is cagey or does not want to give you contacts with previous clients, there is more than likely a reason, and it is probably not going to be a positive one.

Suppliers are also most likely to give you contact details of their best clients.

Be sure that your supplier is giving you examples of businesses that align with your own industry. If you work in healthcare, but their clients are all builders, then you may not be able to accurately assess how well this supplier will be able to work for your business.

NEGOTIATING PRICE

Price will be the trickiest obstacle to navigate in the negotiation process. Even though there are other values to consider in a deal, price is without a doubt something that gets a large amount of attention.

You will likely need a fair amount of expertise in negotiations to be able to reach an ideal price outcome for both yourself and the supplier.

Be prepared for this step to be a time consuming process if you are aiming for both parties to leave happy and ready to enter an ongoing relationship.

STAY ALERT AND WATCH OUT FOR THE FOLLOWING:

1. BEWARE OF ANY PRICES THAT SEEM FAR TOO LOW

They say if it seems too good to be true, then it probably is. A supplier who is giving you prices that are well below market price, and not comparable with any other suppliers in the game, then you have to immediately question the price point. What is that supplier sacrificing that they are able to offer you such a low number?

More often than not, it will be quality. It may also be a case that they are unreliable and simply will not deliver on time. A very low price is a red flag that requires deeper investigation on your part.

2. IS THE SUPPLIER HIDING ONGOING COSTS?

If you explore the subject of ongoing costs, you may soon realise that you’re being charged a very high price if ongoing costs are not factored into an upfront fee.  

3. WHAT IS THE MARKET DOING CURRENTLY?

Measure your supplier that you’re in negotiations with against others in the market. If they seem to be striking a beat on their drum versus what the market is doing, this could be another red flag.  

4. WATCH YOUR OWN BEHAVIOUR. HAVE YOU PUSHED DOWN THE PRICE FAR TOO LOW?

Does the other party seem happy to be giving you your asking price? If you succeed in the negotiation stage at getting your ideal price, step back and think about what expense it was at.

If it seems like you are starting out the relationship on a negative note because of your negotiating tactics, then you may want to rethink your approach.

DRAWING UP A CONTRACT

This is the final step before you embark on your new relationship with your chosen supplier. You’re nearly back to home base. Once your negotiations are complete and you have agreed to close a deal with the supplier, it is wise to draw up a contract that outlines the terms of your deal.

The terms and conditions of the contract may be pre-existing, yours, the suppliers, or both. You may consider getting legal advice to ensure there isn’t anything in the contract that puts yourself or your business at a severe disadvantage by signing it. You want to have your interests protected at all times before entering into a contractual agreement.

It will be up to you and the level of service you require from the supplier that determines the complexity of the contractual agreement.

CHECKLIST OF BASIC CONTRACT REQUIREMENTS:

• Full details of the price agreed upon and payment expectations and terms.
• Delivery details that the supplier has agreed to.
• The supplier retains full ownership of product until it has been paid for by your business.
• A section that outlines the seller’s contractual liability that will also include a clause on the purchaser’s statutory rights.
• You can choose to include the information contained with the SLA into the contract particularly information about exit procedures or what to do in case anything outlined by the contract is broken – either by yourself or by the supplier.

Chapter Four: Managing Supplier Relationships

WHAT YOU NEED TO KNOW ABOUT SLAs

First up, what is an SLA? A Service Level Agreement is a contract between your business and the supplier that describes the service they must provide to you as well as listing priorities and responsibilities that the supplier must deliver on.

They are a wise choice for your business to always set up with suppliers as they are contractual obligations. Therefore they can ensure you will be covered for any issues that could arise from problem management to compensations, warranties to resolution of disputes. It can serve as evidence for any legal issues.

Your business and the supplier must both be involved in creating the SLA together to ensure both parties are in agreement with the terms.

AN SLA SHOULD INCLUDE THE FOLLOWING:

• SERVICE PROVIDED
• THE STANDARD OF SERVICE
• DELIVERY EXPECTATIONS
• RESPONSIBILITIES FOR YOURSELF AND THE SUPPLIER
• WAYS TO TRACK AND REPORT ON SERVICE
• PAYMENT TERMS
• DISPUTE RESOLUTION CONFIDENTIALITY AND NON-DISCLOSURE AGREEMENT
• CONDITIONS OF CONTRACT TERMINATION

HOW TO BUILD A GREAT RELATIONSHIP

Investing time to build good relationships will pay off. Here are a few pointers that will assist you in building the kind of great relationship with your supplier that you’re after:

• Schedule face-to-face meetings with suppliers. It’s much better to know who they are, as well as getting better insight into the operations of their business. With this type of valuable information you will be able to see more clearly how that supplier will be of benefit to you.
• Keep up communication and in-person contact with your Account Manager, build a sense of comradery with them.
• If you see any business opportunities for your supplier, make the introduction. They will be sure to pass on prospects of interest to you as well if you’re putting in the effort to that for them.
• Keep up to date on what your supplier’s plans are for business development. It is important to be in the loop about changes. They can lead to either positive or negative impacts on your business and you certainly do not want to be taken by surprise.

HOW TO BE YOUR SUPPLIER’S BEST CUSTOMER

Follow these steps to rise to the top of your supplier’s customer list, and it will in turn encourage them to go the extra mile for you too.

1. Start a conversation with them early on in your plans for strategic changes or new products – this will help them get a head start on adapting to your needs.
2. Co-ordinate as best as possible your schedule with theirs to find an optimised delivery rate of products.
3. Always pay your invoices on time. One of the quickest ways to tear down a good relationship is through financial issues and may even wind up terminating a contract with a desirable supplier. It may also damage your business’ ongoing reputation.
4. Follow a purchase order system to ensure everything is clear and your needs will be met accurately.
5. Share forecasted plans with your suppliers where necessary so that you can work with them to plan schedules and determine quantities required.
6. Add value to the relationship through soft skills like being personable, having open lines of communication, networking, listening, and always being engaged when you meet with your suppliers.

HOW TO CONDUCT A SUPPLIER REVIEW

(AND WHY YOU SHOULD DO THIS AT LEAST ONCE A YEAR!)

Regular reviews of your the suppliers will ensure they are delivering high-quality service and products to your business. It will also help remind you to keep an eye on the market for better options if you find your supplier is beginning to fall short of the mark.

Your suppliers will be less likely to become complacent towards you when you conduct reviews as they will be aware you’re keeping track of the relationship and will not allow for standards to drop.

Use your SLA as a reference point to check if the supplier is still matching everything they agreed to in the beginning.

Then focus on a series of questions around the relationship to see if the supplier is meeting all your expectations from account management to their customer service response time, expertise on products and services in their industry, competitive pricing, and of course, the ongoing quality of the goods or services you’re purchasing from them.

During your review, the final stage is to look back over the previous year to conduct a spend assessment. Review what you have been spending, what you’re been receiving for your spend, and if there are any discrepancies or areas to improve upon, especially when compared against other suppliers in the market. When you put in the time to conduct spend assessments, it gives you a better ability to negotiate your next contract with the supplier or with a replacement supplier.

ENDING A SUPPLIER RELATIONSHIP

(IN THE EVENT OF A BREAK UP)

If you find yourself in a situation where you will need to terminate a relationship with a supplier, your first move is to check the contract. Unless the relationship is ending at the natural conclusion of a contract, you will have to see what kinds of penalties may arise for you to exit the relationship early.

THE FOLLOWING ARE SOME OF THE MOST COMMON ISSUES TO ARISE:

FINANCIAL:

The cost to terminate a contract may be so high that you simply can’t end it. You will be forced to see the contract through to its originally agreed end.

OPERATIONAL:

Your business may suffer if you are forced into a continued relationship with a low-quality supplier. You may also have issues with running out of products if your supplier has issues around their delivery rate.

DISRUPTION TO THE SCHEDULE:

If you have found a new supplier, there will be a natural transition period from the old supplier to your new one. This time can be hard or easy depending on the nature of the relationship with the old one towards the end. It may simplify things from your end if you are able to have your new supplier agree to take on responsibility for handling the transition. This minimises your level of involvement.

Chapter Five: How to Lower Purchasing Costs

UNDERSTANDING THE POWER OF GROUP BUYING

(IT’S ALL ABOUT STRENGTH IN NUMBERS)

Ultimately, one of your core objectives of setting up formal purchasing within your business and entering into supplier relationships will be to save your business money by reducing expenditure on operating costs and thereby improving your bottom line.

One of the fastest ways to get your business saving costs that will immediately inject some health into the bottom line of your organisation is by joining a business group-buying program.

The benefit of group buying is that it leverages the power of many small organisations, to join together to gain some serious negotiating clout.

With the assistance of a group buying organisation, they are able to take care of many of the gritty elements to purchasing and cut out the large time expenditure that is required during both the search process for suppliers as well as the negotiations.

HOW BUYING GROUPS HELP YOUR BUSINESS

(TO SAVE MORE MONEY THROUGH LOWERED PURCHASING COSTS)

Suppliers who hold partnerships with a group buying organisation will have been put through several quality control tests to ensure that your business is only being introduced to reliable suppliers at the top of their game, who are able to offer both quality of service and value for money.

Buying groups make it easy for businesses to save money as they take a weight off the shoulders of either yourself, or your purchasing department. They work in tandem with your company to make sure you are getting the best value and a great relationship with the suppliers your business needs to operate.

Purchasing through buying groups or other methods of purchasing that allow you to work with suppliers is another way to protect yourself. Especially as you may be able to avoid any long-term contracts or contracts at all, which gives your business greater freedom and flexibility to change suppliers as your business evolves and grows.

By purchasing this way, you can receive competitive pricing without the same level of risk as you carry when you negotiate a contract yourself.