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Three Steps to Selecting the Best Vendors for Your Business

Many businesses rely on inventory—items purchased from a vendor for resale to their customers. Effectively managing relationships with vendors is critical to the long-term success of the business. And, the first step in this process is building the right vendor network. Selecting the best vendors for your business doesn’t start with researching potential suppliers. The first step needs to be developing an understanding of what your business is, whom it serves and what differentiates it from your competitors.

Define Your Unique Business Proposition

Before you start working with vendors, you must clearly determine the unique value that your business provides customers. Put another way, you need to be able to clearly answer the question, “So, why would someone come into your store, rather than the one across the street or down the road?”

This involves understanding your customer, your industry, your geographical area and your competitors. For example, you decide to open an auto parts store.  As you think about your business plans, you may see yourself providing the very best, highest performance parts to the most demanding customers. On the other hand, you may feel that your community needs an auto parts store that serves the person who does their own work, can't afford premium products and will be a frequent customer.  Take the time to firmly envision your customers: their needs, buying habits, price sensitivity. The customer profile will shape, and limit, vendor options.

Once you have your customer firmly in mind, define the characteristics of the ideal products for your customers. Do these products need to be unique and up-scale, or cute and value-priced. Go to various manufacturers’ websites and read their product descriptions. If what they say matches your ideal customer, then you will want to explore stocking their parts. Depending on your timeline and location, it is often valuable to visit trade shows for your industry to get a better idea of the range of products you may wish to stock.  

Determine Your Demand for Inventory

Once you’ve considered your customers and determined the best products to offer, you need to determine your inventory needs. The frequency and quantity of your inventory needs may limit your options in selecting a vendor—and it will certainly impact the negotiation of contract terms.

To determine the demand for inventory requires sales forecasting. Sales forecasting is basically a matter of common sense. You must consider two basic factors:

  1. How often will any one customer purchase your product? Will you see that customer once in a lifetime, every year, a few times a year, or every day?
  2. How many customers can you expect to purchase from your business?

In addition to using your common sense and personal knowledge of your type of business, talk with people you know in the field and with people who purchase the types of products you will be selling.  From the other businesses, try and find out what items are selling well. (They might not give you an exact number, but you should be able to get a feel for the amount.)  But, also ask about how it is to work with vendors. From the purchasers, find out how often they intend to replace/upgrade the items purchased. Are they likely to purchase similar items? And, make sure to ask how the like the items that they bought. Ask them what's "missing"? 

Now only does this help with sales forecasting, it can provide you with insights into which vendors you want to contact, and which ones you may wish to avoid.   Now that you have a clear idea of who your customer will be and have some information on the various manufacturers, you need to start evaluating the vendors.

Develop a Scorecard to Evaluate Vendors

Most products can be supplied by multiple vendors.  In this case, you need to evaluate the quality, reliability and flexibility of each vendor before entering into negotiations and contracts. Here are some basic questions that apply to most businesses.  Your “interviews” with other business owners and customers and well as your knowledge of the industry may suggest others that you will add your scorecard.

  • What products and what quality of products do I need? This is partially determined by the customer profile you developed in Step One. If you are doing high-end work or targeting an up-scale market, you will not succeed by using cut-rate products. Every industry has certain vendors that are the "gold standard."  Generally, these products cost more—but for certain customers, the "bragging rights" are worth the price. Ideally, you want to meet as many of your needs as possible using the same vendor.  This may allow you to get better terms because you are buying more from the vendor. It will certainly cut down on the paperwork that you will have to handle.
  • How often will I need delivery? If you anticipate a high inventory turnover, then you need to have a vendor that can keep up with you. You may also want to consider vendors who can readily increase the frequency or quantity of deliveries on relatively short notice or during high-demand seasons. On the other hand, if you don't anticipate significant turnover or spikes in demand, you may have more flexibility.
  • What terms can I get? You have to have a supplier who will work with you—with both pricing and payment terms. If there are multiple vendors that met your needs, take the time to get a quote from each of them. Don't hesitate to negotiate for better terms! (And, once you have agreed on the vendor, make sure you get the agreement in writing. For larger agreements, you may also want to run the terms and conditions by your attorney.)

Selecting the best vendors for your business is an essential ingredient to long-term success. And, the process begins with knowing what you need and which vendors can meet those needs. Armed with that information, you will be able to build a strong, flexible network to support your business plans.

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