We are all looking for ways to improve our bottom line, and sometimes that takes some creativity. In our earlier blogs we discussed how procurement professionals have much to offer in helping companies achieve their cost saving objectives by doing more with less. An increasing trend to help reach these goals is to create a Preferred Supplier Program by optimizing your supplier base.
Preferred Supplier Programs are developed with strategic suppliers to drive a competitive advantage for both the buyer and seller. There are a few things to consider when selecting suppliers to participate in your program. Businesses should pick 2-3 suppliers per commodity depending on order volume in that category. While you want to narrow your supplier list down, you want to keep a few within each commodity so you have options when placing an order. For example, if one supplier within your program is out of stock, or will give you better pricing than another for a specific item, you have the flexibility to use either one based on your needs and still retain the benefits offered within the program.
Keep in mind that you shouldn’t limit the suppliers that you consider to current ones. The goal is to have the best suppliers based on your organization’s needs in the program. If you have reason to believe that your current suppliers do not include one that would be an excellent fit, now is the time to consider the new supplier.
Below is a list of criteria that you should consider when selecting suppliers for the program:
- Product and service fit
- Current spend
- Realized quality (product defect) rate
- Realized on-time delivery rate
- Customer service/responsiveness level
- Inventory programs offered
- Overall value considering price, services, and quality
After you have selected the suppliers you would like to invite to join your Preferred Supplier program you will need to negotiate the terms of the contract of the program with each supplier. Items that should be considered are:
- Discounted payment terms for early payment, and/or extended payment time (i.e. 2% 10, NET 60)
- Free shipping
- Rebate program based on total sales volume
- Locked in pricing for a set period of time
- On-line or electronic ordering
- Quality requirements
- Acceptance o f normal terms and conditions
- Non-Disclosure and other corporate requirements
All of these terms may seem one-sided in the buyers favor, but there are benefits the supplier will receive as well. If constructed properly, rebate programs can drive more business to suppliers since the buyer has an incentive to place more business with that supplier. Another advantage for the supplier is the commitment from the buyer to make them first call on all quote/buy requests within that commodity. This secures them early access to new opportunities that they may have not had a chance at before.
Suppliers within the program should be monitored on a regular basis to check on performance criteria and to make sure that being partnered with a certain supplier continues to make sense. The overall program should also be monitored to evaluate cost savings and insure that it is achieving pre-defined goals.
One final note is that it is important to design a program that is truly win-win. Programs designed to strong arm the supplier and only benefit the buyer may well achieve short-term cost reduction goals. However, one-sided plans inevitably create churn in your supplier base and result in a weak, unreliable supply chain. In the long run, cost reduction and productivity goals will not be met. Your objective should be to develop a strong, motivated group of suppliers that are real partners in business. Only through a strong supply base are you likely to achieve and sustain your long-term procurement goals.
In conclusion, suppliers are critical to your company’s success. When done correctly, a Preferred Supplier Program can both achieve procurement objectives and build strong supplier relationships.
Kelly Grato is Procurement Manager of RESCO Defense; a Baltimore based certified HUBZone distributor and manufacturer of electronic components and assemblies. After four years as a buyer for RESCO Electronics, Kelly recently became the Procurement Manager at RESCO Defense.
Kelly studied at The Richard Stockton College of New Jersey and Kaplan University. She currently resides in Abingdon, Maryland with her husband.