A Supplier Management Guide for Small Businesses

Suppliers can play a big role in your small business operations. Reliable vendors can help you control costs, maintain quality, and keep customers happy, but the wrong supplier can lead to delays, lost revenue, and operational headaches. 

In this guide, you’ll learn how to choose suppliers that fit your business and build relationships that support long-term success.

What is supplier management?

Supplier management is a process that ensures your chosen suppliers for goods or services are performing effectively and don’t pose operational or financial risk to your business. This includes steps like identifying suppliers, negotiating and managing contracts, monitoring performance, identifying risks, and building collaborative relationships. 

With an effective supplier management strategy, small businesses can:

• Find better product and service quality.
• Lower purchasing costs.
• Reduce supply chain risks.
• Build better supplier relationships.
• Improve delivery times.

[Read more: How Small Businesses Can Navigate Supply Chain Disruptions] 

How to identify potential suppliers

If you’re looking to add your first supplier, or your small business is in a situation where it's time to look for other suppliers, here’s how to start your search.

Clearly establish your business needs

Outline exactly what you are looking for in a supplier. Think beyond the goods or services you need and be specific about order volume, delivery timelines, quality standards, and your budget. If you have any compliance/certification requirements your suppliers need to meet, be sure to highlight them.

Do your research

Browse online directories specific to your industry, as well as local business organizations with network connections. These are often great starting points for your research because other companies often leave reviews of their experiences working with suppliers. You can take your research a step further and dig into your competitors’ supplier list. You may find a similar company that does the same quality work for a fraction of the cost.

Attend industry events

Take advantage of the events happening in your industry. Trade shows are a good starting point for finding prospective vendors, but so are networking events. The more people you connect with, the more opportunities you have to talk about what your business is looking for and possibly receive a lead on a great supplier.

Get referrals

Use your professional network as a referral system. Reach out to business owners who are in your industry, or even adjacent, and ask for their supplier recommendations. Outside of referrals, your connections may be willing to share their past experiences and give you a few tips about suppliers you may need to be cautious about — or stay away from completely.

Issue a request for proposal

Let the suppliers come to you. Use a request for proposal (RFP) to invite suppliers to submit a bid to work with your business. Since the RFP will outline your goals, scope of work, timeline requirements, and budget, you will be able to compare interested suppliers who submit proposals easily.

[Read more: 7 Steps to Creating a Procurement Process for Your Small Business] 

Key criteria for evaluating and vetting a potential supplier

Once you’ve found a pool of potential suppliers that you think could be a good fit for your project/business, you need to look at the whole picture. 

George Clements, Owner of Can't Quit Moving, said the focus of your evaluation should come down to communication, reputation, quality, dependability, their appreciation for your business, and, your budget. But price shouldn’t be the only determining factor. 

“A dependable supplier that delivers on time and communicates well can save a business far more money than one offering the lowest quote,” said Angela Petulla, Vice President of Marketing at altLINE by The Southern Bank.

Before making a decision, Petulla suggests small businesses look at a supplier's track record and ask for references. 

“Don't be afraid to ask tough questions about [the supplier’s] track record when speaking with any references as well,” she added.

Tips for negotiating pricing and terms with suppliers

Every expense matters when you are operating a small business, and the price you pay suppliers is worth the effort of negotiating pricing and terms.

“Suppliers assume as a small business you need them more than they need you,” explained Clements. “If you do your research beforehand and have other options, you show them that you deserve their respect and will be a good client moving forward if you decide to go with them.”

While it’s important to know what your business might be worth to a supplier, Clements warned not to divulge too much information about your operations in an attempt to prove your business is larger than it is.

“In doing so, [this can] hurt the negotiations,” Clements explained.

Instead, exercise these strategies during your negotiations:

• Ask open-ended questions. Instead of demanding specific terms, ask questions that get you closer to what you want. For example, you can ask,  “What kind of flexibility can you offer on payment terms?”
• Leverage your consistency. If you have been, or plan to be, a repeat customer, ask about things like a reduction in minimum order quantities. Since the supplier knows you place orders often, there’s much less risk with your business if you need to place a smaller order than usual.
• Focus on establishing a partnership. A supplier isn’t just someone who provides you with a product; they are a business, too. Put referrals, customer testimonials, and collaborative projects on the table during negotiations. These incentives can often get you more favorable terms.

“If possible, it’s smart to give [potential suppliers] a small test order or project to see how [they] perform before committing to a larger partnership,” suggested Petulla. This strategy allows you to see how the supplier meets your requirements and evaluate them on a real task, and use your experience as leverage in your negotiations.

How to build strong supplier relationships over time

According to Petulla, the best supplier relationships can be summarized by three things: transparency, consistency, and trust.

“Businesses that establish trust are often the first to receive flexibility during supply shortages or maybe offered better payment terms when cash flow is tight,” said Petulla. “But the key to building that trust is by being honest from day one. Remember, they’re a business owner, too, so they can probably relate to a lot of your challenges.”

Don’t forget to establish loyalty when building your supplier relationships. This is often the key to a less transactional relationship.

“One of our suppliers that we’ve had for years contacted us asking if we could place an order with them to meet their quota,” Clements explained. “We will always need their supplies …but just might not need [them] right away. However, if it will help them [now], they will remember that.”

Clements added that this relationship-first approach has saved his company money in the long run with price increases. 

“They kept our prices down when everyone else’s prices went up,” he said.

[Read more: How to Build Customer Loyalty: 5 Tips for Small Businesses] 

Key components for managing your supplier base

Continual supplier management will protect your small business in the long run. Here are a few things to prioritize when managing your supplier base.

Keep track of supplier risks

Don’t stop evaluating your suppliers once they are on your bill list. It’s important to monitor the following:

• KPIs. Track the data most important to your business, like on-time deliveries, responsiveness, order accuracy, inventory, and product quality. If you have your data in one place, you can easily reference it month to month for risk trends.
• Business stability. Review public financial information and keep an eye on sudden payment term changes. It’s your job to do your due diligence and be aware of possible disruption to your supply chain.
• Compliance. Check your contract(s) to determine whether your supplier is keeping up with the necessary certifications and/or regulatory requirements outlined. You have a responsibility to be aware of how your supplier is, or is not, doing business.

Know when it’s time to diversify

If you’ve been operating with a single-supplier dependency, you could be setting your business up for a major setback in the future. While working with a single supplier may seem “easy” from a paperwork perspective, it can actually lead to missed opportunities, less leverage in negotiations, and increased risk. 

Here are a few supplier red flags to keep in mind, signaling it’s time to diversify:

• Costs continue to rise with no explanation.
• Delivery dates are frequently missed.
• Communication has become poor or vague.
• Product quality has decreased.

If your supply chain does get disrupted, prioritize minimizing customer impact and maintaining trust by communicating honestly about the issues you are facing.

Keep your options open

Just because you already have a supplier doesn’t mean your door is shut to other vendors. If another supplier contacts you, listen to their proposal.

“Yes, loyalty is important, but what if your supplier goes out of business?” Clements argued. “Maybe try and use [the new] supplier for a small order or with a product your current supplier doesn’t offer. It’s always good to have options when you need them.”

CO— aims to bring you inspiration from leading respected experts. However, before making any business decision, you should consult a professional who can advise you based on your individual situation.

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