Today I will be sharing ideas with you about selecting suppliers for your manufacturing business. It is NOT based on the lowest purchase order price, and if you think it is, you or your boss are very short sighted. Let me explain a better more productive process.
Which is better for your organization: paying $1 each but they are sometimes late and sometimes have bad ones mixed in with the good ones, and invoices are often wrong, OR $1.02 each but they always arrive on time with excellent quality and invoices are never an issue?
Let’s say you buy 1,000 of these each month. The difference in PO accounts payable would be $20. That easily pays for the better performance of the 2nd supplier. Even if you buy 100,000 per month, the $2,000 difference is more than paid for by your internal efficiencies gained. In fact, the more you buy, the more your internal costs for dealing with the lower PO price supplier. With his performance problems he will rarely be the smart business choice. But he might be.
Could the 1st supplier bring value to your organization with industry trends he sees, by recommending changes during your product design that save you money and increases performance, on providing an environment for his workforce that is aligned with your core values? In this case he may be the better choice, as he is likely willing to have you help him improve quality in both product and invoice processes.
You see, true commitment to core values and mutual dedication to joint improvement of competitive advantage speaks highly about your organization, and his. That means your employees are less likely to read your core values plaque on the wall and laugh as they see how you select suppliers. They will see mutual respect is a total commitment, not just a convenient theory. Those reactions will enhance their dedication to doing their best for you and your organization as they see how you contribute to making their job easier.
Now, your accounting group may tell you that you’re overpaying if the PO price of your chosen supplier is higher than someone else’s, but they will be wrong. It’s just that PO price is easy to compare while all the improved trust, mutual development and cooperation is harder to measure. You’ll know it’s there, and your supplier will know it’s there, but you accountants may not. It will show in the bottom line, but not in the Cost of Goods Sold where they expect it to be.
It’s your job to make your organization more competitive as you support the mission and vision in concert with core values. That definitely involves working with the supplier to lower his costs so he can lower his price to you. It does not mean throwing out an excellent supplier because of a few thousand dollars that aren’t real anyway.
I encourage you to define what you believe are the attributes of an excellent supplier who will help your organization improve. Discuss that list with the CFO; cost accountants may well not understand what you’re showing them. Reach agreement on those characteristics with the CFO. Then evaluate your current suppliers for consistency with that expectation. Help them understand your expectations and how you will listen to and support their needs in providing them.
If they have no interest, it may well be time to search for alternatives. Now you know how to evaluate those options. You will see a logical priority evolving from knowing how many you need to replace, their current negative impact and the resources you have to bring on a new supplier. That costs also. But over time, if you want the best suppliers to help your company succeed, this is a process that must begin. I hope that most of your suppliers are willing and able to work with you for mutual advantage. For those who are not, there is much more to implementing this than I can explain in a 5-minute podcast, but you know where to start!
You know how I’m going to close this podcast: Start now, and as always, Finish Strong.
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