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All businesses need suppliers to provide them with the things they need to run the business. It is difficult to run a business without suppliers because the business will be unable to generate everything it needs from scratch. Sometimes businesses will use suppliers because it is cheaper than producing the goods/service themselves.

What is a Supplier?

A supplier is any entity that provides a business with the items they need to set up and manage their business. The items that a supplier provides depend on the business;

•  If the business is a manufacturer its suppliers will provide the raw materials required to manufacture goods

•  If the business is a retailer its suppliers will provide the products that the retailer sells

•  If the business is a trades person its suppliers will provide tools and items required to fix, install and replace items for householders and organisations.

Why Do You Need to Select the Right Supplier?

It is important to select suppliers carefully as suppliers can affect the businesses they provide goods to. If a supplier provides a poor quality product to a firm, it may affect the firm's reputation as the firm will need to use the goods or sell them onto their customers. Similarly if a supplier provides a slow or poor service, this may slow down the service the business provides to its customers.

Choosing the Right Supplier

Firms should take the following into account when choosing a supplier:

Supplier Selection Diagram


  • Supplier history and reputation
  • Quality of the Product/Service provided by the supplier
  • Price charged by the supplier and how does this impact on the quality of the product/service provided by the supplier
  • Financial strength i.e. does it have good cashflow and strong balance sheet
  • Size of the Supplier and its other customers i.e. does it normally deal with businesses of your size
  • Capacity of the supplier i.e. how much can the supplier comfortably provide and what is its maximum
  • Reliability of Service
  • Flexibility of Service
  • Turnaround Times i.e. how long will you need to wait for delivery after placing an order
  • Payment Terms i.e. how quickly does the supplier expect payment and method of payment
  • Problem resolution process i.e. what will happen when things go wrong

Supplier Management

After agreeing a contract with a supplier it is important to monitor the supplier's performance to ensure that they are providing the service that was agreed with them. Some firms will agree targets known as Key Performance Indicators (KPIs) that suppliers will need to meet. Taking this a step further some contracts will include terms that impose penalties on the supplier if they do not meet their KPIs and rewards if they exceed them. Firms that monitor supplier performance will usually hold regular meetings with the supplier to discuss their performance and to agree appropriate actions. Meetings with suppliers also provide the opportunity to discuss service/contract amendments if the firm's requirements have changed.


Businesses are reliant on suppliers; suppliers provide the tools a business needs to operate. If a firm manages to negotiate a favourable contract with the right supplier they are likely to benefit. However the wrong supplier or unfavourable supplier contract is likely to have a detrimental effect. If things go wrong with a supplier it may take time to switch suppliers and even if you do manage to switch suppliers quickly it could take time to recover from the effects of a poor supplier.



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