Choosing and managing suppliers

1. What you should look for in a supplier

A robust supply chain is essential for any business, providing reliable business operations and the flexibility to adapt to change. Selecting suppliers that meet your business needs is critical to business success.

There are key factors that you should look for when identifying and short listing possible suppliers and the importance of these will depend on your business priorities and strategy.

• Quality and reliability. Check that the supplier provides high-quality products or services and can meet your standards every time. The quality of your supplies needs to be consistent - your customers associate poor quality with you, not your suppliers. Equally, if your supplier lets you down with a late delivery or faulty supplies, this can waste your time and money, and let your customers down.

• Speed and flexibility. Flexible suppliers help you respond quickly to changing customer demands and sudden emergencies.

• Value for money. The lowest price is not always the best value for money. If you want reliability and quality from your suppliers, you'll have to decide how much you're willing to pay for your supplies and the balance you want to strike between cost, reliability, quality, and service.

• Strong service and clear communication. You need your suppliers to deliver on time, or to be honest and give you plenty of warning if they can't. The best suppliers will want to talk with you regularly to find out what needs you have now and how they can serve you better in the future.

• Financial security. It's always worth using credit checks as you want suppliers that are financially stable, with steady cashflow and not likely to go out of business when you need them most.

• Data protection and cybersecurity. It is important to determine that your supplier has strong data protection measures in place and good cybersecurity - especially if suppliers will be handling customer data.

2. Finding and choosing potential suppliers

Finding suppliers

It's best to identify possible suppliers through a combination of sources to give you a broader base to choose from. These include:

• recommendations - from friends or business acquaintances

• supplier directories - there are numerous supplier directories that you can find online - check out Scottish Enterprise’s list of supplier directories by sector  

• trade associations - if your needs are specific to a particular industry, many sectors have associations that list approved or accredited suppliers

• business advisers - Business Gateway advisers can offer advice on all areas of business, including finding suppliers

• trade shows and exhibitions - attend trade shows to meet potential suppliers in person and compare products

• wholesale B2B platforms - such as Faire and Alibaba

• Government sources - you can also search through public contracts notices to find suppliers that have won Government contracts, services such as Public Contracts Scotland’s supplier finder, and UK Gov Find a Tender.

Drawing up a shortlist

Ask yourself:

• Can these suppliers deliver what you want, when you want it?

• Are they financially secure?

• How long have they been established?

• Do you know anyone who has used and can recommend them?

• What clients do they currently have?

• Are there any reviews or feedback available online that you can search for?

• Are they on any approved supplier lists from trade associations or government?

Approach suppliers

Prepare a clear brief, summarising your requirements and giving an idea of the level of business you hope to place.

Depending on what you are purchasing, you may want to arrange informal face-to-face “chemistry meetings” with shortlisted suppliers, to establish whether you have similar values and culture, and understand how their business operates before providing them with your brief and requesting a more formal proposal or estimate. 

Remember that responding to requests for meetings, estimates and proposals takes a lot of time for suppliers, so only request information from those you would genuinely consider working with.

Due diligence

Check whether your supplier will be outsourcing any work to subcontractors, or relies on other suppliers for critical components or services. If so, you may want to assess these suppliers as well.

Remember that your business' reputation may be judged on the labour practices and environmental record of your suppliers. You should consider the ethical and environmental impact of your supply chain.

Before signing a contract with any supplier, you should carry out due diligence to check it can fulfil the agreement. You should credit check potential suppliers to ensure they have the cashflow to deliver what you want, when you need it. It's also a good idea to get references for the supplier from other customers.

3. Negotiating with suppliers

Once you’ve chosen which suppliers to work with, you’ll need to negotiate terms. Start by listing your key priorities, such as price, delivery, or payment terms, and decide areas where  you will or will not compromise. Plan your strategy beforehand to set clear goals and know when to walk away.

State which parts of the deal you’re happy with and what you’d like to discuss, and ask the supplier to do the same. Don’t reveal concessions too early, use them as bargaining chips. Let the supplier offer the first price and details of discounts, and never accept the first offer. Ask what else they can include at the given price. On the flip, always question prices that seem suspiciously low and check whether quality, value, and after-sales service are good enough at that price. 

If the price includes features you don't need, try to lower it by asking to remove those features from the deal. Use your buying power to negotiate better deals, such as bulk discounts. However, avoid trying to push prices unrealistically low, as this may reduce quality or service, which could cost you in the long run. Once you reach an agreement, set out the key terms in writing.

4. Drawing up service level agreements with suppliers

What are service level agreements (SLAs)?

Service level agreements (SLAs) are agreements with suppliers that define the service and level of service to be delivered, and assign responsibilities and priorities.

SLAs 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 service is being provided.

Typical SLAs set out:

• the service being provided

• the standards of service

• the timetable for delivery

• respective responsibilities of supplier and customer

• provisions for legal and regulatory compliance

• service monitoring and reporting mechanisms

• 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, such as rebates on service charges.

Drawing up SLAs

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.

You may need to accept a supplier's standard SLA. If this does not guarantee the service quality you require, you may need to look for alternative suppliers or make contingency plans.

Include regular performance reviews in the SLA and assess your own performance too - for example late payments can affect service standards. Consider applying to the Fair Payment Code, a UK Government backed initiative that shows you have a proven track record of timely payments, which can boost your reputation with suppliers. 

5. Building good relationships with suppliers

It pays to invest time in building good relationships with your key suppliers. Consider doing the following:

• Meet your contacts face-to-face and see how their business operates. Understanding how your supplier works gives you a better sense of how it can benefit your business.

• Keep in regular contact and update them on strategic changes or new products early on. This helps them adapt to meet those changes.

• Ask about their plans for development or expansion. Will this affect the goods or services they're providing to you?

• Help your suppliers by placing orders in good time, being clear about deadlines, and most importantly paying on time.

• Make sure you have efficient purchasing, stock control, and payment systems.

• Keep an eye open for any opportunities you can pass their way - in a good customer-supplier relationship they'll 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.

6. Ending supplier contracts

There are many reasons to end a supplier contract, including poor quality, unreliability, or if you find a better deal elsewhere. 

Before you do, check the contract for early termination penalties and ideally include an exit clause to your contract upfront to minimise penalties. Otherwise, the penalties may mean you are effectively locked in with that supplier.

Changing suppliers can cause disruption to your business, so ensure that your existing supplier gives you all the information you need to make the transition smoother. If possible, negotiate for your new supplier to handle the changeover process. To avoid problems, consider the possible pitfalls of ending a contract early at the contract negotiation stage and seek legal advice if needed. 

Have clear guidelines for ending contracts to maintain good relationships, and explain your reasons for ending the contract - the supplier may be able to offer a better deal to keep your business.

For more information, read our guide on outsourcing.