Are my vendors helping me? A guide to Vendor selection
Vendor selection is one of the most critical activities a distributor must undertake. Your vendors will be delivering products to produce your goods or for you to sell to your customers.
Vendor selection criteria
Vendors are one of the key elements of a sound distribution practice. This begs the question of how to select the right pool of vendors. There are many issues to consider when evaluating a potential supplier but I group them into 4 categories, namely:
- Product criteria
- Market considerations
- Service and Support elements
- Financial conditions
Let’s review each of them.
Vendor selection criteria 1: Product considerations
These have to do with the product offerings a potential vendor can contribute to your portfolio. The main are:
Portfolio: In general terms, it does not matter whether a vendor can offer 1 or 100 products, as long as they generate a reasonable profit for our operation. However, the greater the quantity and variety of products the vendor offers, the lower the logistics and financial costs. This is especially true for international suppliers, where minimum order quantities (MOQ), longer transportation times, and customs clearance apply.
Price: the price at which the vendor offers his product is a critical variable. When transportation and nationalization costs, your margin as a distributor and that of the store are added to the supplier price, the result must be competitive with equivalent products in the market. Otherwise, the vendor will represent a burden.
Competition: the more “unique” the product is, the easier it is to sell in the stores. For example, selling a new wine or a new snack product is rather cumbersome because there are many similar products already on the shelves.
Vendor selection criteria 2: Market considerations
This category has to do with the added value that the potential vendor will bring to your operation. The most important are:
Market recognition of the supplier´s brand: It is different to sell products from widely known brands like Nestle or Procter & Gamble, for example than products from Chinchang. In the latter case, the effort required to start selling at the volumes required to be profitable will be a lot greater than in the former.
Vendor stability: To introduce a new product in the stores that you serve requires time and money. The last thing you need is a supplier with little time in the market and unproven financial stability. When evaluating a potential new vendor make sure to verify that he is and will be on the market for a long time.
Compliance with market regulations: Once you have approved the vendor and the products you will buy from him, you need to verify that the products comply with the government regulations related to it. This is especially true for foods and beverages with FDA regulations on products and packaging conditions, as well as manufacturer approval from an FDA authorized agency. In many cases, for foreign vendors, product customization is required to comply with regulations. Make sure they are willing to do it.
Vendor selection criteria 3: Service and Support
In this group are all the special considerations that a vendor is willing to grant to help you penetrate the market and get to the profitability point.
Exclusivity: Sales of a new product are more complicated if it is already being sold by another distributor. Suppliers who are willing to provide you with regional exclusivity are the first choice. If they do, make sure to put it in writing in a “Distribution Agreement”
Marketing aids: We have already talked about the importance of marketing aids as a tool to increase in-store sales. This is more true in the case of the introduction of a new product. It is easier if you offer special conditions to the store, like an introductory discount, sampling and tastings, etc. Even more, many Supermarkets and Supercenters require them in order to accept new products. These activities require an investment that lowers your gross profit. Vendors willing to support you with fund allocations for market impulse activities score highest in the evaluation matrix.
Vendor selection criteria 4: Financial considerations
This is the most important element to select a new vendor. You gain nothing by selling a product that sells well but its profit does not translate to your cash flow. Many variables impact the cash generation and profitability of a product: lead time, logistics times and costs, incoterms, and payment terms are some of them. I group all of them in a single KPI that I call the “Vendor Financial Cycle” or VFC.
VFC is the added cash contribution of the products supplied by a vendor. If the VFC is negative, it means that the sales of the product will result in the drainage of your cash flow. Conversely, a positive cash flow means that you will collect the sales of the product before you have to pay them to the vendor, causing your cash flow to increase. The Gantt chart below shows a simplified example of an average sales cycle for an imported product.
In this exercise, the time elapsed from when you placed the purchase order (PO) to your vendor to when you collected the sales from the products in that PO is 76 days. So, if you have to pay your vendor before those 76 days, you will have to take money out of your cash flow to fulfill your payment commitments with the vendor. This implies an increase in your working capital needs. Even worse, the more you sell, the more working capital you need to comply with the vendor. Many variables will increase or decrease the sales cycle:
- Collection time varies depending on the stores. Big chains like Walmart or Publix request at least 30 days but might offer a “prompt payment” discount whereas Independent stores might pay earlier.
- E-commerce channels typically pay in shorter times.
- Lead-time varies widely from one vendor to another.
- Logistics costs are rampant and changing month after month.
- The sales time of a PO depends on the position of the product in the market. For new products, it will be longer than for established products.
For domestic suppliers, the situation is better. In the example below the sales cycle could be reduced to 50 days. Besides, domestic suppliers tend to be more flexible in payment terms if your payment record is good.
I hope this article has been helpful. I will continue to publish information related to Warehouse Management, distribution practices and trends, and the general economy. If you are interested in this article or want to learn more about Laceup Solutions, register to keep you updated on future articles.
If you are a newcomer to the United States, this video could be helpful. Take a look!