How Suppliers are Evaluated
The supply chain is the lifeblood of manufacturing. Raw materials or components must arrive at their destinations on a reliable schedule for operations to run efficiently. Global trade has expanded customers’ options when buying goods, but also made logistics more complicated. Purchasers must consider familiar concerns such as cost and efficiency while keeping an eye on compliance requirements and operational risks that cross hemispheres. Failing to properly manage a supply chain can have disastrous consequences for a business.
How Suppliers are Evaluated
Identifying the best vendor for a particular job is often challenging. While cost is an important factor, simply going with the lowest bidder ignores real threats that can derail operations. Procurement officers evaluate suppliers through several lenses, including:
- Capabilities: Vendors must be able to consistently produce high-quality goods at a pace that meets a business’s needs. Quality-control issues and production delays can have a cascading effect throughout the supply chain.
- Financial Stability: A supplier with a healthy cash flow may be more resilient in the face of economic headwinds or short-term challenges. Manufacturers need to have confidence that their partners will be around to fulfill orders.
- Compliance Concerns: Government regulations and laws weigh heavily on procurement departments, and include measures designed to prevent forced labor, environmental damage, and money laundering. Vendors that fail to comply with these rules can be fined or prosecuted, both of which present risks to their customers.
- Pricing: Businesses want to contract with vendors that offer goods at a low price. Aside from increasing margins, these savings can be passed on to their own customers for a competitive advantage.
Managing Vendor Relationships
Once a supply chain is in place, businesses must be proactive in tracking vendor performance and mitigating risks. Companies that source goods from multiple suppliers should understand how important each partner is to their business. Known as supplier segmentation, this process allows procurement departments to gauge their organization’s exposure to disruptions along the supply chain.
Customers cannot simply take a “set it and forget it approach” to supply chain management. Open lines of communication allow partners to better understand the state of each business, including opportunities to improve performance or lower costs. Businesses that grow complacent about their supplier relationships risk missing important signs of financial stress. No procurement officer wants to wake up one morning to discover that a critical supplier has shut its doors.
Why Supply Chains Fail
Supply chains fail for a variety of reasons: vendors struggle to fulfil orders, natural disasters prevent the movement of goods, or businesses cease operations altogether. These are the types of scenarios that keep procurement officers up at night.
Supply chain risk mitigation processes can prepare businesses to deal with whatever challenges come their way. Business credit monitoring, compliance software, and company information databases help buyers manage risk. These resources can provide quite a bit of data on vendors, from business credit scores and ratings to outstanding debts. It’s not uncommon for buyers to serve as suppliers to another company, and these same resources can be used to protect a business from unreliable customers.
Supply chain management encompasses a variety of concerns, from onboarding vendors to ensuring the relationship is healthy and profitable. You can learn more about supply chain concerns in the articles above.