How to Choose a Supplier

Introduction: Quite often, organizations use price as the determining factor when considering which supplier to select. While price is an important determining factor, other dimensions such as quality, lead time and payment terms must not be overlooked. Here is a comprehensive list of criteria that may be used to make the best decision.

Quality: The cost of poor quality extends much further than the carrying cost of safety stock to ensure supply can meet demand. If a component of your product has been outsourced and that part is defective, your customer will associate the poor quality with your product. Not only will your organization have to pay to replace or repair the item, but it will also affect the perceived quality of your brand, further reducing future sales opportunities.

Lead Time: Lead time is the time between placing an order and delivery of the product. The longer the lead time, the higher the cycle inventory and safety stock must be to meet demand. This higher inventory translates to higher costs to maintain these inventories and must be taken into account when evaluating the “best price” from each supplier.

Delivery Reliability: While this may be difficult to evaluate, especially for a new supplier, it is worth investigating from past or current customers. For example, a large supplier may place your order on a lower priority when they are busy if you are one of their smaller customers. This means you will receive your order late, which again may mean having to carry extra stock. It is much better to have a reliable delivery at the expense of a longer lead time as other operational activities may be planned in advance to reduce costs.

Flexibility: Since forecasts are almost always wrong, a flexible supplier should be able to quickly respond to changing market needs. For example, what mechanisms exist for a rush delivery? What costs are involved? Will the lead time be the same as for a regular delivery, or will it be shorter?

Transportation Costs: The transportation costs associated with delivering the product to your location is part of the total purchase cost. In some cases this cost is buried in the product’s unit cost, while in others it is shown as a separate line item. For local suppliers, it may be possible to arrange a pick-up using your own trucks, reducing transportation costs further. Distance and mode of transportation (truck, rail, and air) are key drivers that affect transportation costs.

Pricing Terms: Suppliers typically offer quantity discounts for larger batch sizes, however extra holding costs for inventory should be factored in if the batch size is significantly larger than what your requirements are. Some supplier offer additional discounts for early payment. For example, a two percent discount may be applied if payment is made within 10 days. This may be beneficial for your organization depending on what other options it has to utilize its working capital.

Technological Capability: Although this is more qualitative, the ability of your supplier to provide you with accurate, timely information will help with planning and increase customer service in the event of a stock-out situation. Web-enabled suppliers that track your order status enable you to make adjustments as well as to inform your customers of changes to their order. Using the phone to track down the supplier and wait for an answer may not be good enough for some of your customers who demand instant updates for their order status.