Supplier Size: It Matters
PurchTips edition #76
By Charles Dominick, SPSM, SPSM2, SPSM3
Does Your Selection Criteria Include Supplier Size?
You need a supplier who will stay in business on a long-term basis. You need a supplier whose capabilities are scalable, so your delivery, service, or quality will not suffer if your volume increases.
But you also need a supplier who values your business. When you're unhappy with the supplier or you need special assistance, you need your supplier to put forth extraordinary effort towards satisfying you.
Selecting a supplier of the "right" size - relative to your spend with them - can meet all of these needs.
Generally, if your business represents less than 1% of a supplier's annual sales, you won't be extremely valuable to them. So you may not get the service or attention you may need at critical moments.
Conversely, if your business represents over 10% of a supplier's annual sales, that supplier may be too dependent on you. Decreases in your volume could force them to lay off portions of their workforce or even go out of business. That would negatively impact your ability to satisfy your requirements when regular demand patterns are restored. Additionally, volume spikes could clog the supplier's operations.
When comparing supplier proposals, note the percentage of each supplier's sales that would be comprised by your business. Assign one of three designations to your evaluation sheet to represent that percentage:
<1% 1 - 10% >10%
If the highest ranking supplier is assigned either the "<1%" or the ">10%" designation, reconsider how the supplier's size may negatively affect the performance you get out of that supplier during your relationship.
It may or may not change your decision. But it is something to be considered. Personalize this process: Think about your own attentive and inattentive suppliers. Calculate the percentage of their sales that is comprised by your spend. Then adjust the percentage thresholds (1% and 10%) to reflect the correlation between supplier size and attentiveness in your experience.
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