In February, CEO of Gallaher & Associates Tom Gallaher found his business nearly a million dollars in debt thanks to a crooked accountant. Gallaher had to act swiftly in order to correct the problem, pay off the debt and keep his business, an Alcoa, Tennessee-based life safety systems company, afloat.
But along the way he realized something crucial.
“In our crisis, I learned very quickly that our survival was contingent upon our suppliers being willing to work with us through our struggles,” Gallaher says. To weather the storm, Gallaher chose to be upfront about the company’s turmoil. He re-evaluated his suppliers and, in the end, formed more effective, productive, and long-lasting relationships with them.
Thankfully, most small business owners don’t need an internal financial crisis to prompt a fresh look at their suppliers. So as you gear up for 2012, it’s the perfect time to see if your own relationships will hold up in the future. Here are three of questions every small business owner should ask themselves about their supplier relationships.
1. Are the lines of communication open? “The communication aspect is key,” Gallaher says. “I had a responsibility to communicate with my suppliers and let them know where things stood in our crisis. They knew we were not just ignoring what we rightfully owed them.”
But communication is a two-way street.
“During a recession, frank communication is important,” says Paul Martyn, Vice President of supply strategy for BravoSolution.
Whereas in a healthy economy you might want to check in, communicate with, and audit your suppliers whenever you observe problems, in these financially unstable times auditing companies suggest you undertake the process annually, regardless of observable issues.
Martyn recalls a case in which a large supplier underwent severe financial difficulty.
“One of the things that was helpful was one of the buyers from that company was constantly asking intimate questions around the delivery of their products, the financial health of the company, and how that supplier was being treated by their suppliers.”
Bradly Davidson, Vice President of Consulting Services for Expense Reduction Analysts, says your suppliers should also be eager to regularly check in with you.
“A good supplier will bring [new] opportunities to you and not give you a reason to go out into the market place to look for alternate sources,” he says, adding if there’s radio silence, there’s likely a problem.
Gallaher agrees. “Likewise, if [our suppliers] can’t make good on their commitments, we expect them to be proactive and reach out to us.”
2. Are they reliable? The first step in determining reliability is basic desktop research. Above and beyond using a search to get information on a potential supplier, Martyn suggests purchasing research from an independent party.
“There’s a reliability aspect that is recorded by third party rating agencies, such as Dun & Bradstreet or Equifax,” he says.
He also encourages seeking out independent customer references.
“Ask your account rep for references or look at press releases of your particular supplier and reach out to that organization to speak to other clients in your sector,” he adds.
And before you sign a contract, Davidson encourages a trial run with the new supplier.
“You want to make sure that not only the quality of the product matches the promise, but also the supplier’s service,” he says.
While working with a client that was accustomed to receiving weekly shipments, Davidson opted for a short trial to see if a new supplier would be a good opportunity.
“In this particular case, the trial was three weeks; three Mondays. The first Monday came and there was no shipment. Furthermore, we had to call them — they were not proactively calling us. Week two, Monday morning comes and there was still no product and the company had a different story,” Davidson says.
Davidson and his client decided not to go with the new supplier — the trial run revealed too many flaws in their service.
3. If my business grows, will they be able to support me? Amir Meghani, Vice President of Grand Time Corporation, works with suppliers from all over the world in order to source the materials for the timepieces his company makes.
Over the past five years, he has seen Grand Time quadruple in size — meaning his needs from suppliers has grown exponentially as well.
“Are my suppliers investing in technology and innovation? Will working with them be easier as I grow or more difficult?” Meghani says. He explains that sharing your own numbers and forecasts is important.
“Aim for as much visibility as you can, as far as projects, potential demand, order size and frequency,” he says.
However, he also warns that as you grow there may be a margin of erosion.
“As you get bigger you want to leverage your buying volume. The more you have, the better pricing you can get from suppliers. Take advantage of an increase in buying power to improve your rates,” he says.
Ultimately, you should be able to use the competition to leverage a better deal for yourself — with a new supplier or with your original.