Supplier and Vendor Management Guide for Small Businesses

Suppliers and vendors are the support network of your business. Whether it’s coffee beans for a cafe, crucial machine parts, or the printer toner delivery guy, they help you provide service to your customers. But if those vendor/supplier relationships get set up without the attention they deserve, it can accidentally hurt your business through supply chain disruptions, unmet project deadlines, or failed deliveries. Essentially, the opposite of what you want for you and your customers!

But having good relationships with your suppliers and vendors doesn’t require a complete system overhaul. Setting expectations, establishing basic agreements, and prioritising partners go a long way toward building stronger, more productive relationships. Let’s dive in.

Vendor vs Supplier: What’s the difference?

Before you start building relationships with them, it’s good to know the difference between a supplier and a vendor. While sometimes they are interchangeable, individually, they provide different services.

• Suppliers: Think goods and materials. These are things you need to make a product or run your business. Own a bakery? The place you buy flour from is your supplier.
• Vendors: Think services and software. These operators provide a service that you don’t do or can’t afford to handle in-house. Think about your accounting software provider or IT services.

Both suppliers and vendors provide something your business needs to function, at varying levels of importance.

Supplier/vendor relationship life cycle

Typically, your relationships with your suppliers and vendors will follow a “life cycle” that looks like the following:

• Select: “Shopping around” for a new supplier or vendor, and choosing based on offerings and value.
• Onboard: “Installing” a new supplier or vendor in your operations.
• Manage: Going on “cruise control” with your supplier or vendor — using their services, monitoring how well they deliver them, and addressing any issues if they arise.
• Renew/Exit: Doing a “performance review” to see if you like their service or want to look around elsewhere.

Common mistakes businesses make with their suppliers/vendors

Here are the most common mistakes to avoid when choosing the right supplier or vendor for your small business.

Choosing price over value

This is a common pitfall for small businesses and customers alike! Low prices seem like a great deal — until something goes wrong, and you find out why the cost was so low. So consider carefully when choosing suppliers and vendors based on price, because there could be hidden risks involved in using cheaply (i.e. poorly) made products or services.

Here is a quick “how to choose” checklist when considering price:

• Comparison: What’s the difference between their service and their competitors? Is pricing justified?
• Capacity: Can they meet your demand?
• Reputation: What do customer reviews and other businesses say about the quality of their products and services?

No expectations set

A functional relationship depends on knowing your roles and how you work together. You have defined expectations on how your relationship works. Not having expectations leads to assumptions, which means you’re not on the same page with your vendors and suppliers. When a problem occurs, it takes twice as long to solve because you first have to establish what the problem actually is.

Instead of guessing, discuss with your suppliers and vendors what matters to you in your partnership. Look at scope (what’s involved), timing (urgency of deliverables), quality (effort and standards), and communication (best point of contact).

Poor communication

Make sure to have clear, defined communication rules with your critical suppliers, since if you can’t contact them — or they can’t contact you — chasing missed deliveries or replacing faulty products becomes nearly impossible.

Set up a protocol that you and the other party can agree on. Look at low-priority communication (email), medium-priority communication (office phone contact with any staff member), and high-priority communication (direct contact with the owner/responsible staff member).

Relationship complacency

Many businesses make the mistake of sticking with suppliers and vendors they’ve outgrown. Usually, this is because of the short-term pain of leaving, familiarity, personal attachment, or the cost of switching providers. But if it can’t meet your needs or give passable service, the supplier or vendor could actually hurt your business.

That’s why it’s important to remove personal feelings and move on, or “break up” with suppliers and vendors when it suits your business. Don’t get stuck with bad service, terms that no longer fit, and auto-renewals. Instead, get proactive and act before the renewal date/notice period.

How to prioritise your supplier and vendor relationships

Not every supplier or vendor will have the same level of importance to your business — so you shouldn’t treat them the same, either. Instead, prioritise your vendors and suppliers by listing them as:

1. Critical: Your business can’t operate without them if they go offline.
2. Important: Disruptions with them create reduced services in your business.
3. Transactional: Occasional dealings, competitors are interchangeable.

When you sort your suppliers into these groups, you elevate essential relationships and set goals for each that make sense for your business. For example, putting the communication needs of your major supplier over an occasional contractor is basic prioritisation.

How to prioritise suppliers and vendors

When choosing which priority your supplier or vendor fits into, ask yourself a few questions:

1. What function do they provide for your business?
2. How important is that function to your business?
3. How easy is it to replace them?
4. What is the risk exposure of using their services?

These will help create a solid list of your suppliers and vendors. If you’re unsure about risk exposure, consider what could happen to your business if they shut down or delivered faulty products or services, and prepare a backup plan.

Set expectations: Minimum viable agreements and KPI targets

Once you’ve mapped out your priority list, set the tone for your relationship with each vendor and supplier. Your critical suppliers are almost like business partners: draw up agreements that build long-term partnerships and include service standards, pricing, lead times, minimum order quantities, and paths for governance when disputes arise.

You can achieve this by creating minimum viable agreements that cover:

1. Defined outcomes: What do you want to achieve with this supplier/vendor? How does it work toward your business goals?
2. Tracking and measurements: Set KPIs (timelines, accuracy, uptime) to track the progress of their deliverables.
3. Risk management: Attach responsibilities to deliverables and list who is in charge of what. If there is a problem, the person responsible (based on risk management) can help address it.
4. Dispute resolution: When conflict arises in the relationship, establish clear rules and guidelines for resolving it before it happens.

Proactive relationship management, not reactive, is the key here, so when problems do occur, you have a structure to follow to solve them quickly.

Relationship goals: Performance reviews

After you’ve built them, check in with your supplier and vendor relationships by doing yearly performance reviews.

Start with your own internal review to assess whether the supplier still meets your current business needs, has reasonable prices, and is easy to work with. Metrics like KPIs can guide discussions in this step.

Next, touch base with your supplier or vendor with an external review, and create an external review plan based on their priority level. For instance, you could set monthly or weekly meetings with critical suppliers for regular business updates. Here, it may be wise to assign a staff member to “own” (be responsible for) certain aspects of the relationship with a critical supplier. For owner-operators, you’ll need to handle this responsibility yourself.

How to jump-start your supplier/vendor management

Partnerships are only as good as the terms that underpin them. While small businesses don’t always operate with in-depth contracts, they can create an easy framework to by:

1. Prioritising key suppliers and vendors.
2. Writing minimum viable agreements for each.
3. Making a review plan to check in with business needs and goals.

Getting the most out of your partnerships helps your company thrive and grow. A great supplier and vendor management system favours collaboration over transactions — which builds a stronger, more resilient business.