How to Preserve Critical Vendor Relationships

By Julie Rains on 11 November 2009 (Updated 26 April 2010) 0 comments

Cash flow management has always been an integral part of business management. When credit gets tighter and business bankruptcies rise, creditors – including your vendors – start getting very concerned about past due invoices. Monitoring cash balances is essential and withholding payments until the last possible moment may be necessary, but be careful: being slow to pay in order to manage cash reserves may alienate you from vendors that provide mission-critical products, raw materials, or essential services.

All vendors deserve to be paid on time but if you are in the process of making decisions about which vendors to pay, understand which ones have the most impact on your short-term needs and long-term viability.

Slow pay is the new delinquent.

For years, your vendors may have not pressed for on-time payment but accepted that some customers paid late. As long as payments were made within a reasonable timeframe, vendors kept shipping product or providing services. But as credit markets tighten, vendors need the cash to pay their suppliers. As a result, they may place credit holds on any customer that has an outstanding balance, late or not. Limiting exposure is one way of minimizing credit risk.

Establish which vendors are critical to your success.

Start by defining what products, materials, or services are critical to your business. Your company may need a certain raw material with physical properties that differentiate your products from the competition. Outsourced professional services may allow your organization to comply with environmental regulations or maintain information security. There may be brands so dominant in the retail landscape that not offering these in your product assortment would mean a dramatic loss in consumer traffic. Or, you may need a specified level of service to fulfill contractual commitments with your customers.

Then, figure out if those products, materials, or services in the form you need, when you need them, and at the price you need to maintain profitability are widely available from a multitude of vendors or if they are in limited supply.

Critical vendors are likely ones that supply materials or products that are needed nearly every day. But some vendors may offer highly specialized and hard-to-find products or services that are used infrequently. Your company may work with a toy manufacturer just once every year for the make-or-break holiday season or an intellectual property attorney who offers invaluable advice on patenting your inventions on an infrequent basis.

All vendors in a well-managed business should be important, but those that offer specialized products, materials and services not readily available elsewhere are the most critical to your success.

Determine your value to your vendors.

Figuring out your company’s value to your vendors has two main components:

  1. the profitability of the entire relationship, and
  2. your position compared to other customers.

Just as a customer evaluates vendor performance, either through formal scorecards with ratings on categories such as price, on-time delivery and quality, or informally through casual discussions with purchasing agents and end-users, vendors will consider all aspects of a customer relationship.

Customer profitability can be measured not only by considering revenue for each account but also by analyzing costs associated with servicing the customer (such as providing customized product features, packaging, and transportation routing), extending credit longer than intended, and collecting payments.

Your status relative to all of the vendor’s customers isn’t perfectly straightforward but requires some detective work, analysis, and judgment. Begin by considering your competitive position in your industry. Gather market intelligence by shopping retail markets, attending industry events, and reading trade publications to judge where your business stands in relation to competitors. If your company has carved a market niche using commodity materials to create value-added, proprietary products, then you may have no problem keeping vendors. But if your business is a small player in a huge sector, competing with cash-rich companies for limited supplies of a raw material or highly branded product line, then you may not be all that important.

After evaluating your industry position, think more specifically about what your vendors have been telling you, either directly in conversations or indirectly through their actions. Responsive service with account reps who quickly handle problems likely means you are a valued customer. If a vendor regularly shares market intelligence that has allowed your company to capture a new market or increase sales, then the vendor probably adores you. But, if a vendor provides you with unreliable service that has caused you to miss sales opportunities or fail to meet provisions of a customer contract, then your business isn’t all that important.

Summary

Only you can decide the best way to manage your cash flow but taking a long-term view while dealing with pressing issues is what will help your business survive. Right now, make sure you preserve relationships with difficult-to-replace vendors who provide critical products on a day-to-day basis. Pay those vendors within a time frame that is clearly acceptable to them. Otherwise, you’ll likely find yourself on credit hold and unable to get products or services from vendors who hold the keys to your immediate survival and success. But don’t ignore those who you will need later if these vendors have exclusive or extremely hard-to-find products or services that your company needs to continue doing business.

Companies will be more discriminating in working with customers who are the most profitable and pay on time. Vendors may streamline operations and eliminate low-profit, slow-pay customers, abandoning sales growth to focus on boosting the bottom line. Make sure you are positioned to be a part of the future.

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