Is My Business Ready to Take On Suppliers?

In this part of the management course we’ll focus on suppliers, starting with the basics and working our way up to the more advanced level. So first we’ll define what a supplier is, and the five ways we classify them.

What is a supplier?

At this point, many of you probably already know exactly what a supplier is, but we’ll define it one more time. A supplier is a person or company that provides us with products or services to meet our needs and help us reach our goals.

What’s the difference between a distributor and a supplier?

The main difference between a supplier and a distributor is that the distributor is the intermediary between the supplier and the customer. Distributors have significant warehousing capacity along with a sales and delivery force that serves stores in a specific area. So a distributor sells the suppliers’ products to consumers.

How do we classify suppliers?

1. By the role they play within the company

For the business that takes on suppliers, they fall into two groups:

• Internal suppliers: This term refers to a company’s own employees who have to deliver a specific product within a set deadline. An example would be the people in charge of producing reports or market research.
• External suppliers: These are the companies or people who supply and cover a business’s needs so the entity buying their products can operate. An example would be a company that sells fabric to a clothing store that turns it into garments. In this post, we’ll focus on a company’s external suppliers.

2. By the type of products, services and resources they offer

• Product suppliers: This refers to the group of suppliers that offer another company tangible products, such as a company selling furniture, objects or any product needed to carry out the activity.
• Service suppliers: These are the ones that supply a company with intangible products, in other words, services. For example, cleaning suppliers for an office.
• Resource suppliers: This term refers to suppliers of financial resources such as capital, credit or partners. Clear examples would be investment funds or the government.

3. By the risk each one carries

Here, every company has to analyze its business and carry out an A-B-C risk analysis, which we’ll explain later. This step is very important for identifying suppliers according to the role they play within our company. That way we’ll know how to handle them and what measures we should take in each situation.

• Type A suppliers: Critical supplier. High risk.

They provide us with products and materials essential to the company’s operation. A product or delivery failure here puts our business at risk.

These are the suppliers we need to keep a close relationship with and devote the most effort to. They require constant monitoring, evaluating quality, delivery times and receipts. It’s also always recommended to have a supplier as a plan B, placing a couple of orders a year with them in case we run into any problem with the main supplier. This group accounts for 80% of total purchases.

• Type B suppliers: Important supplier. Medium risk.

Roughly 15% of suppliers fall into this category. We have to keep a close eye on them, evaluating product quality and analyzing receipts. If we see we’re not having problems, we can do this exercise less often.

• Type C suppliers: Non-critical supplier. Low risk.

They don’t require as much attention or negotiation effort, since they have a minimal impact on total costs or savings. This would be 5% of our business’s total purchases.

A-B-C analysis example with Excel, step by step

Many companies run their risk analysis based on the percentage of purchases, but we should also consider whether a supplier is a key piece for our business, regardless of how much we buy from them, when assigning its specific risk type.

In this example, we’ve kept it very basic so you get the main idea. The steps we followed were:

1. We place all suppliers in different rows within the same column. We write down the total purchases we’ll make and the amount we’ll spend on each supplier.
2. Here we used an Excel formula that basically is: each supplier’s amount divided by the total purchases, multiplied by 100. That gives us each supplier’s percentage of total purchases.
3. To move on to the fourth column, we sorted the values from highest to lowest and added them up cumulatively, since type A suppliers correspond to 80%, type B to 15% and type C to 5% of total purchases.
4. In the Supplier sum column we’re working with percentages. When we reach 80 (which would be the type A ones) we find 3 suppliers. We start adding again from Shoesy SA to reach 15 (which are the type B ones). In this case we have the value of 8+5, which comes to 13. Since it’s very close to 15, we’ll say these are the type B ones, and the remaining ones, which account for the 5%, are type C.

4. By international market conventions

This last group classifies suppliers according to the role they play within our business’s purchasing process. It will help us keep better records and have greater control. The standard in the market is that every acquisition is made after reviewing 3 quotes from that supplier.

• Regular suppliers: They’re not part of the supplier register (the ones required to obtain 3 quotes).
• Reliable suppliers: These are the ones the company takes into account and that are essential for carrying out its business activity. That means they need more than one quote.
• Specific suppliers: They supply products for which it’s very hard to find a substitute on the market.
• Contract suppliers: The company signs a service agreement with them, so no quotes are needed during the contract period.

Related terms in the supplier chain

• Manufacturers: People or companies that make the product.
• Retailers: They sell products without intermediaries, whether in a store or through different channels.
• Wholesalers: The person who deals with the producer and the business that wants their materials, without dealing with the end consumer.
• Distributor: The one in charge of getting the product to the customer.
• Importer: In charge of bringing products from other countries into the domestic market.
• Exporter: A person or entity that sells products in international markets.

To wrap up, supplier classifications are different and varied, yet complementary at the same time. The more we analyze our business and the suppliers we work with, the more efficient we’ll be. We need to value our suppliers and keep a strong, close relationship in case any incident comes up.