Running a background check on prospective employees by the company HR is well-known. What about your suppliers? Vendors in many ways are an extension of your organization helping you manage work processes and assure delivery. By doing a thorough screening of suppliers, you can prevent loss of reputation or fines and lawsuits.
How do we short-list them?
Some suppliers are recommended by their existing users while others could be known from the approved list of trade associations or Government.
While embarking on a new business relationship, conduct a thorough background check. Is the supplier a legal business entity with proper licenses to perform work? Have there been any pending lawsuits or criminal convictions? Some companies shut down due to negligence or bankruptcy and reopen under a new name.
Cloud-based databases today make it possible to do such background checks of prospective suppliers remotely by downloading related reports and data.
Affordable pricing by suppliers could ultimately give a good value proposition to end customers. While competitively priced suppliers are welcome, ensure they don’t compromise on quality or service standards. Any sloppy work on the supplier part can result in incurring extra costs in the form of replacement or loss of business/reputation.
As a thumb rule, diversify your bets. What if a single supplier goes out of business or becomes complacent and lowers their delivery standard?
Faulty products or late deliveries are bound to let your customers down. Can suppliers deliver consistently on quality and at the right time? How long has it been in the business and what is its reputation? Large suppliers with a good business track record are generally reliable as they have resources and systems in place to manage contingencies. However, don’t ignore small vendors who are ‘flexible’. In their quest to succeed amidst intense competition, some are willing to take extra efforts by responding better to different requests such as rush orders or stock replacement.
An FMCG company, for instance, might be introducing a new product or doubling production to cater to increasing demand. Does the supplier have the flexibility to quickly adapt to changing business dynamics as well as emergencies?
Service Level Agreements are often built into supplier contracts where service standards, the timetable for delivery, legal and regulatory compliances and payment terms are set out. Not least, confidentiality and non-disclosure provisions, the dispute resolving mechanism as well as termination conditions.
Align with financially strong suppliers who could withstand business vagaries. In times of pandemic, supply chains of many companies were disrupted as their vendors went out of business. A robust balance sheet, as well as financials across multiple business cycles, would indicate that the supplier is able to withstand downturns. Check the supplier’s credit history to get a glimpse.
While technology-driven businesses need not be limited by locational constraints, others can keep supply chains local to reduce business risks. It has the potential to reduce supply chain costs, improve flexibility and contribute to the local economy. However, don’t ignore distant suppliers that are best in delivery and service. In overseas sourcing, communication standards (including language barriers), as well as country-related risks, need to be well-understood.
Your business practices would be judged on the labour and environmental practices of your suppliers. So, if a construction company is hiring a contractor who in turn is violating labour standards prescribed by Company law, then it would be legally binding. So, while hiring a supplier, ensure their business value aligns with that of yours. Whenever possible meet them in person and check how their businesses operate.
Your supplier can make or break your business. Do thorough background checks to ensure they pass your standards of reliability, affordability and trustworthiness.
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