It’s tempting to choose the cheapest vendor without considering how that could backfire.
Eighty-seven percent of firms surveyed in Deloitte’s 2016 Global Survey on Third Party Governance and Risk Management reported that their business had “experienced an incident with a third party that disrupted their operations.” A further 11% “experienced a complete failure in their vendor relationship.”
These breaks in business continuity were undoubtedly costly, although Deloitte didn’t offer an exact figure. In addition to any losses incurred from the vendor disruption, the firms involved likely paid hefty legal and public-relations fees to mitigate damage.
Businesses can prevent similar third-party risk and reduce long-term spend by conducting a vendor analysis that focuses first and foremost on quality. Ask the following five questions of every vendor your business considers to ensure that your standards for quality are met.
Ready to centralize and scale your company's purchasing?
Will the vendor pass a compliance screening?
A vendor analysis should always determine whether the vendor complies with the law and engages in ethical business practices. Third-party fraud is a very real risk, and the costs of associating with a vendor that conducts an illegitimate operation can be immense.
How immense? Forty-seven percent of the companies surveyed in PwC’s Global Economic Crime and Fraud Survey 2020 said they experienced fraud in the last two years. The cost of these incidents resulted in a whopping $42 billion.
These numbers underscore the importance of proactive third-party risk management. Don’t assume that a vendor has been vetted for ethical standards because it sells its products on a major eCommerce platform. In an SEC filing last year, Amazon said it was “unable to prevent sellers in [its] stores or through other stores from selling unlawful, counterfeit, pirated, or stolen goods,”The Wall Street Journal reported. Most eCommerce platforms behave as just that: a platform. It’s on you, as the buyer, to do the due diligence.
Does the vendor share my business’s values?
Associating with a business that does not share your values and customer promises poses a risk for your reputaion. Avoid public-relations fees and damage to your brand by prioritizing brand values during vendor analysis.
Think about what your brand actively stands for. If your brand promotes female empowerment, for example, it would be hypocritical to order from a vendor that doesn’t offer maternity leave. Likewise, if your brand is committed to protecting the environment, you should pay attention to the vendor’s own policies around sustainability. Ask about how products are sourced, stored, packaged, and delivered to ensure that your standards are met.
Brands are frequently called out in the media for cost-cutting behavior that deviates from their stated values. Nike, for example, was exposed last year for denying payment to sponsored runners when they became pregnant, while simultaneously championing women’s sports in a series of ads. The backlash that followed these revelations convinced Nike to change its policies, but customers were lost for life.
You don’t want to end up in the same place as Nike. Stay true to your brand promise by partnering exclusively with brands that share your values.
Can the vendor scale with my business?
Any product that is essential to who you are as a brand should be sourced from a vendor who can scale with your business. Make sure your vendor analysis considers business continuity not just today, but as you grow.
Say, for example, you run a Pilates studio. Your first location is a smashing success, so you open three more. And then another five. But when you try to create an order for the necessary equipment at the third wave of locations, you learn it isn’t possible. Your vendor can’t support the size of your custom order. Reluctantly, you purchase different equipment from the vendor, but when it arrives, it isn’t up to the same standard of quality your customers have learned to expect. Disappointed by the changes, your customers fall out of the loyalty loop and begin experimenting with other studios.
The right vendor should be able to support larger quantities of your order if/when your business grows. If it can’t, your ability to offer a consistent customer experience across locations is at risk. Inconsistencies are harmful to your brand and can cost you in revenue if they result in diminished customer trust.
How will the vendor source my product if there is a disruption to its supply chain?
An out-of-stock item can range anywhere from a nuisance to a major blow to business continuity. During your vendor analysis, ask each vendor about their contingency plans for out-of-stock items to avoid any surprises if/when you begin working together.
Vendors source their products from a wide range of suppliers, who, in turn, have suppliers of their own. The potential for business disruption is immense, especially when manufacturers are located in places with high geopolitical risk. Fortunately, many vendors are large enough that they can offer a similar product if yours goes out of stock. You’ll want to know, however, which product they are likely to replace your usual order with, what key differences exist between the two products, and whether there will be significant additional charges for the swap.
Does the vendor provide a high-quality experience?
A vendor that gets your order wrong or can’t guarantee timely delivery will end up costing your business.
Let’s say your spa places a bulk order for cleaning products and hand sanitizer. The delivery arrives a few days late, so you ask your receptionist to pick up some cleaning solution from the pharmacy before his shift. Not only do you now have to make an ad hoc purchase at a markup, but you also need to pay your receptionist for his time and process his expense report.
Occasionally, issues like this will arise. Life — and weather — get in the way of what we plan, and we have to be adaptable. But what happens if this becomes a recurring issue? And what if, when the package does arrive, the order is incorrect? Now your receptionist has to run to the pharmacy and return a package, but your business still hasn’t received its cleaning supplies.
Avoid situations like this by asking the vendor for references who can attest to the quality of the vendor’s services. You can also check out their online reviews on sites like Better Business Bureau. During your vendor analysis, pay attention to reviewers who comment on the accuracy and timeliness of orders, the quality of products, and the willingness of the vendor’s customer service team to quickly resolve issues.
Vendor analysis shouldn’t end with a contract
Your vendor analysis should be an ongoing process, with annual audits to ensure that your partnership is still cost-effective. Determine the expected versus the actual costs of a vendor during these audits, adding in any additional fees incurred from using the vendor’s services. You should also assess whether your or the vendor’s values have changed and whether the vendor still meets your compliance standards.
Negotiatus’s network of more than 3,000 vendors makes ongoing vendor analysis easy. We work with each customer to identify strategic savings opportunities, improve vendor performance, and ensure that your supply chain is never disrupted. To learn more, schedule a demo with a member of our sales team.