For years Fortune 500 companies have demanded that potential vendors jump through hoops to get their business. Few small companies carry the same clout; in fact, one bad supplier could put a growing business out of business. At Softub, a $15 million builder of hot tubs in Chatsworth, Calif., one almost did.
Four years ago Softub contracted out the assembly of the motor, pump, and control unit that provides heat and jet action to the hot tubs. Chief executive Tom Thornbury felt confident about the vendor after meeting with the owner twice and because other customers raved about it. "That was back when I was the purchasing department. That might have been the problem," he says. It wasn't long before equipment failures surfaced during testing -- and in customers' homes. Soon after, the supplier went belly-up, and Softub was stuck servicing damaged tubs and trying to mollify the dealers that hadn't quit. Thornbury estimates the cost of the foul-up at about $500,000. "If we had done a better job of surveying our suppliers," he says, "this might not have happened."
Two-thirds of Softub's product cost is in materials purchased from about 200 vendors, which range from large producers of sheet metal to mom-and-pop makers of nuts and bolts. Softub strives to keep its inventory low, so if a vendor's goods are faulty, part of the spa maker's line is quickly shut down and workers are sent home. Two years ago, after several other incidents involving substandard parts, Softub decided to do things differently.
The big change: an audit team, led by purchasing agent Gary Anderson, goes out to grill vendor candidates. Ten of Softub's 130 employees participate; an engineer may check on technical specifications, for example. The team members receive information about the vendor, as well as trade-journal articles with tips on evaluating suppliers. They spend anywhere from two hours to two days with each prospect, getting to know everyone from the president to the factory workers while noting things such as oil slicks around the machinery.
To ensure that the audits would be effective, Anderson designed a vendor survey form, which acts primarily as a checklist. "It isn't a cure-all; it's only part of the analysis. But it forces the team to focus on specific areas so we don't forget anything when we're on a visit," he says. The form, which Anderson created in less than two weeks, also generates discussion about crucial issues, such as timeliness of delivery. Back at Softub, copies of the completed form go to purchasing, quality control, operations, and the finance department for their input. (One candidate on a short list was screened out when an engineer who'd received the form spotted a possible quality problem.) Anderson also verifies a supplier's claims with at least three of its other customers. When all the information is in -- and after all necessary product testing has been completed -- management meets and selects one vendor.
"The payoff is that we're recruiting a better breed of supplier," says Thornbury. With less chance of issuing purchase orders that suppliers can't satisfy, Softub experiences fewer product defects. And vendor turnover has been halved. That's significant because every time the company switches suppliers, it must repeat the survey process as well as test a new prospect's product, which can take months and cost hundreds of dollars a day.
The improved supplier base brings another big advantage: smart ideas. One vendor gave Softub's employees a free course on handling electronic parts that are sensitive to static electricity. "We're developing partnerships," says Thornbury, "in which we have a pretty free exchange of information. Also, as we've gotten to know our vendors better, there are fewer surprises. In a manufacturing operation, surprises can be lethal."
This article originally appeared in Inc. magazine in April 1995, and was written by Stephanie Gruner.