Charlie Frye works with 20 different suppliers to get the parts and materials to build brewing tanks for his Portland, Ore., business Metalcraft Fabrication LLC. From valves to raw stainless steel sheets, every component needs to be just right and on time. But from shipments that never went out because of payment confusion to those that were sent with unfinished materials, Frye has learned what can go wrong. Now, he stays in close contact with suppliers to make sure his needs and the terms of payment and delivery are made clear from the outset.
Small-business owners should put together a new vendor checklist, advises Jason Bader, managing partner at The Distribution Team, a Portland, Ore. firm that specializes in inventory management and distribution consulting. “It really makes you a much better judge of who you ought to be working with.”
Here are 10 key questions you should consider asking suppliers before doing business with them:
1. What are my payment terms and are they negotiable? One of the primary ways Frye sustained his business was by negotiating terms with his vendors. While payments for invoices are often due within 30 days, you can talk to your vendor about getting 60 or 90 days. Receiving a discount if you pay in advance should also be part of that discussion, Bader says.
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2. What will my total costs be? While a supplier might give you a quote for the cost of a product or materials, be sure to ask about other fees, says David Akers, founder of Cleveland-based Sourcing Office, which provides group purchasing and shared services programs for the public and private sector. For example, will you have to pay delivery fees, fuel surcharges or restocking charges for returns? “Have [suppliers] go back to the contract and identify any line item that is going to cost you money,” Akers says.
3. Can you give me a liability insurance certificate? Your suppliers should provide written proof that they have adequate liability insurance in the event that their products or parts malfunction. Get a new copy of the liability insurance certificate each year to make sure the policy is being renewed, Bader advises.
4. Are you going to sell direct? If you’re a distributor buying a finished product, you want to make sure your supplier doesn’t sell it directly to the end user at such a sharply discounted rate that you can’t compete. Sometimes manufacturers will use distributors to help get their brand established, then cut them out of the picture. “It’s kind of the cardinal sin of supply chain if a manufacturer jumps directly to the end user,” says Bader, but you’ll never know unless you ask.
5. Can I have a guaranteed sell-through?
You don’t want to get stuck with a finished product that flops or the parts and raw materials for a product that doesn’t sell. Talk to your suppliers about their return policies. You want to negotiate what Bader calls a guaranteed sell-through, which gives you the opportunity to return unsold products or materials, whether for credit or cash.
6. What happens if materials don’t arrive? It’s inevitable that orders will sometimes arrive late. But what happens then? You want to find out whether your suppliers will offer a discount for goods that don’t arrive on time or pay for goods they didn’t deliver and you had to get from another source, Akers says.
7. What is my expected gross margin? If you’re a distributor, ask the manufacturer how much you should expect to make selling particular products. For example, if your company generally averages a 32 percent gross margin and your supplier says you should be getting only 25 percent on its products, Bader says you probably don’t want to carry them.
8. Under what circumstance might prices change? You need to be prepared for suppliers to spring price increases on you. Ask them what determines a change in price. Is it tied to inflation or an industry index? If prices go up, how much notice will you receive? Conversely, if a supplier’s own costs go down, will your price go down, too?
9. Do you have a volume rebate? Often suppliers offer incentives. You want to ask about discounts you could be eligible for. If you agree on a certain purchasing goal and reach it, find out if you can receive a rebate, Bader says.
10. When do I take ownership of the product? Does the product you ordered become yours as soon as it’s delivered or after a certain grace period? You want your supplier to give you time to inspect goods and ensure they are in proper condition, Akers says. He advises including a delivery and inspection clause in your contract that allows three to five days to check out an order before taking full ownership.