Can they pass a basic test?

Given the huge reliance that a small business needs to place on its key suppliers, their selection requires careful due diligence and selection. Great relationships are essential for any small business and will go a long way in ensuring the success of your business. Ensuring security, reliability and continuity of supply is paramount.

Suppliers are essential providers of working capital to a growing business and at some stage a business will want to approach key suppliers for better terms, discounts or even credit. Building up a solid track record with suppliers is going to be essential in order to achieve this.

At the same time, the credentials of potential suppliers need to be carefully verified as there are a number of players who do not have the track record, experience, skills and financial standing which they claim to have. This extends from their number of years in business, their key customers, systems capabilities, claimed accreditation or association memberships, the size and capacity of their businesses and ability to perform. Utilising their services can result in considerable performance risk being assumed.

It is also important that you establish alternate suppliers of key consumables, raw materials or services from both a contingency and business continuity perspective and in order to establish credibility with alternative suppliers. It is possible to outgrow a supplier who isn’t capable of meeting the demands of a growing or demanding business. Relationships with suppliers have to be managed. A strategic supplier review should be undertaken annually to not just review service levels and capacity of key suppliers, but to test pricing in the market with competitor suppliers. The selection of ethical suppliers is also crucial. Relationships have to be built on trust and not just on the terms of contracts. Contract suppliers represent a specific risk to any business both from a non performance and quality perspective. This is counterparty risk and it has to be managed on an on-going basis.

Utilising their services can result in considerable performance risk being assumed. The provision of falsified accounts and financials as well as customer and bank references is also prevalent. Particular care has to be taken if you are looking to use B-BBEE - accredited suppliers or contractors or are required to pay up-front deposits. You also need to be wary of service providers who make use of sub-contractors or agents to deliver or perform on their behalf.

A supplier screening and transparent evaluation process must be in place. This ensures that not only are supply chain and supplier performance risk minimised but that supply objectives of continuity, quality and price or where required, preferential procurement, are met.

Notwithstanding the credibility of parties, how well intentioned they may be or their professional standing, you could still be faced with situations where you are required or will need to enforce terms and conditions of a contract or agreement. This could be around non-performance, non-delivery, delays, damages, penalties, negligence, specifications not being met or default. As a result you need to ensure that your counter-party holds the required insurance, as it is no use just having a valid claim and being able to sue successfully if the parties do not have the financial resources, are worthless or are made of straw. Effectively your recourse for compensation will then be against the party’s insurers.

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