A food business is only as good as its supply chain’s consistent ability to deliver the best produce at the best price. But what makes a good supplier and where and how do you find them?
Factors such as pricing, reliability, credit arrangements and the stability of the supply company all play a huge role in selecting suitable suppliers. Location, friendly, well-trained staff and an extensive product range are other factors for small business owners to consider.
David Long, director of Volition, claimed to be South Africa’s largest independent supply chain consulting company, told Smart Procurement that good suppliers deliver the right quality product or service, at an appropriate price, at the promised time. “A good supplier does all of this by getting to know their customers’ business and specific needs,” adds Paul de Paiva of wholesale fish supplier, Fisherman’s Deli.
Strong suppliers are also consistent in pricing and quality. They attempt to contain price fluctuations by monitoring the market and looking to the future in order to offer stability as well as quality. Good suppliers also keep clients informed about their products and about the trade in general and understand that helping their customers grow will, in turn, benefit their own operations.
Trade magazines and yellow pages are traditional sources of leads and the Internet is another option. Long also suggests asking for referrals from companies using similar products. “Word of mouth is good because it also carries an element of the experience received. So ask around, people are usually quite happy to share their stories.”
The search for suppliers is an ongoing process because new products are constantly developed and bring with them a new crop of potential suppliers, says Da Paiva. Visit expos and industry conferences to stay informed with both market trends and who the key suppliers in the specific industry are.
Reference checks are the best way to determine the credibility of a supplier. Business owners should establish how long the potential supplier has been up and running and who their key clients are, De Paiva advises. Also discreetly ask other suppliers about the reputation of the company.
Corporates and companies that are more organised around procurement go through a supplier engagement process from which small business owners can learn. Long explains that this process includes a questionnaire where suppliers have to fill in information about products, financial stability, service capability and quality measures. This allows the company to do reference checks with other customers in order to corroborate the applicable information. This information can also be used to check a supplier’s credit, quality and service and delivery history with other customers, if these are important to the purchaser.
From a legal point of view, a contract exists whenever two parties have agreed to something. However, it is much better to have the deal in writing especially if there are differences at some point down the line.
According to Long the main aspects to include in a contract with your suppliers are:
- Details of the parties to the agreement;
- Start, duration and termination dates;
- Definitions of the products or services, including any product standards;
- Pricing of the product or service, including price breaks, volumes, rebates, discounts and incentives;
- Delivery terms and service levels;
- Payment terms; and
- Recourse mechanisms when any of the above are not met.
(A sample supplier agreement is available at www.volition.co.za in the white papers section.)
“A service level agreement containing key elements like quality, delivery times, temperatures of products, invoices to be delivered with the goods, monthly sales reports, written notice of product shortages and letters motivating price changes are also a good idea as it assures that everyone involved knows what is expected of them,” adds De Paiva. He emphasises that the most important issues to address in the supplier contract are the price and the notice period required before any pricing changes as this will allow the business owner to be better equipped to manage their own pricing.
When negotiating for credit, first establish how much credit you will need from a specific supplier. For example, estimate how much of a product you expect to sell in what period of time. “Business owners are generally required to fill in this information on their credit application,” says De Paiva. The information on the credit application is then sent through to an agency like Credit Guarantee who informs the supplier if the requested amount is an acceptable risk.
“Suppliers often include credit facilities as part of their product offering to make their service and product bundle more attractive,” says Long. In order to manage this, established suppliers often have their own contracts and credit applications, which can be quite onerous for small business owners. The contracts may also require sureties and include other recourse mechanisms that the supplier can invoke at any time.
Long suggests that small business owners read Crashproof your Business by Peter Carruthers before signing any credit applications. “Business owners must be very careful of what they sign and should be sure that it is absolutely necessary before signing a surety.” There are many other more suitable ways to obtain credit such as bank overdrafts, asset financing and credit cards. All of these need to be considered carefully.
Building a strong relationship with a supplier is like building one with anyone else says De Paiva. It requires honesty, loyalty, integrity and sometimes compromise from both sides.
Long emphasises that business owners should first determine which suppliers are crucially important to their business as this is normally around a quarter of a business’ total supplier base. “In building the relationship, the measurement of how each party has behaved is a good starting point,” he adds. He suggests business owners ask themselves the following questions:
- Does the supplier deliver when promised and what percentage of deliveries are delivered when promised?
- Does the product or service match the specifications?
- Are the invoices / pricing correct the first time?
- Do we pay on time?
Long believes that if both parties can agree on these common measures, it gives a good basis for building and improving the relationship through communication focused on the real issues, rather than assumptions and hearsay.
Products should be inspected as they a
re delivered, so that they can be returned or replaced immediately if they aren’t up to scratch. This will prevent later queries where there may be doubt about the cause of the defect, says Long. It could also be more costly for both parties to rectify the problem at this late stage.
The Fisherman’s Deli distribution centre offers an excellent example of measures that can be put into place to ensure delivered goods are up to standard. Their distribution centre is SABS approved and as such have systems in place that stop any sub-standard goods from entering the warehouse at the door. Management checks the temperature, packaging, production / expiry dates, as well as the cleanliness of the delivery vehicle before accepting any products.
“Where a problem is detected after delivery, the terms of the Service Level Agreement should detail the recourse that is available to fix the problem,” says Long.
If measures aren’t in place and there is concern about a supplier’s performance, the first step is to document the problems as this will be necessary should some form of conflict evolve. Documenting agreed upon measures as a daily administration task will make it much easier to terminate a supply agreement should this become necessary.
De Paiva says business owners should send written warnings to underperforming suppliers explaining the issues causing concern. The supplier should then be given a time in which to rectify the situation. Should the supplier still not deliver an agreeable service or product, the business can immediately cease to buy from the supplier and source products or services elsewhere.
Many small business owners are reliant on timely delivery of quality products and services by external suppliers. These businesses can run into serious trouble when there is a problem in the supply chain and they, in turn, are unable to deliver to their clients or patrons. While price is a determining factor for small or growing companies, reliability and an open and honest business relationship are probably just as important. Good supply chain management is therefore crucial for success.
Louise le Riche – Food Industry Focus
David Long – Volition Consulting Services 082 802 0620 or dlong@volition.co.za
