11 Business Challenges in 2011: Vendor Performance in the Economic Recovery

Vendor performance was an emerging issue in 2010 and will become a problem for more businesses in 2011. If you got through last year without any difficulties, don’t be sure that you’ll be so lucky this year. If you did work through some issues last year, you may find that they worsen soon or that your solutions don’t “stick.” All companies that need other firms for critical supplies or services should analyze their situations.

Why does vendor performance become a problem? Demand for a product or service can grow faster than supply. That’s why oil price ran up sharply in 2007 and 2008. Some of the same dynamic is at work now, with the emerging economies showing strong growth.

The most common causes of vendor performance problems during economic recoveries are layoffs and financial weakness. Many companies cut staff. Now they only have a handful of people with certain skills. When they go looking to re-hire the people they laid off last year, those folks may not be available.

Financial triggers of vender shortfalls are common after lean years. Companies weakened by the recession may not have working capital to buy the inputs that they need in order to fill your order. They could very well have tapped out their trade credit, and banks are hesitant to lend to companies with weak financials. Your order may be very profitable to your supplier, but goes unfilled until he gets payment from another customer so that he can produce your goods.

Other vendor performance problems derive from reduced capacity. In some cases, entire plants were shuttered because of the recession. Re-starting a factory may be difficult. In other cases, the equipment was sold or repossessed, so re-starting is not an option. Some businesses have deferred maintenance to the point that they cannot respond to increased orders without downtime.

What do you do about the problem of vendor performance? Step one is to evaluate your critical needs. Which goods or services do you absolutely need to continue your operations? For most products, you can call around and find plenty of alternative suppliers. Now you focus on those few items that would not be easy to source from another vendor.

At this stage it’s time to meet with your vendor’s management. Don’t just have your purchasing guy talk to their sales rep. Talk to senior management of your vendor. Ask how much they could increase their production before they run into problems. How much are they ramping up now to serve other customers?  Then go through the list of possible constraints: their physical capacity, their staff, their finances, their own critical vendors.

Hopefully you’ll get good news. If you’re doubtful, however, it’s time to explore other options. You don’t have to break up with your current vendor; just start dating around. You may find out that switching vendors won’t be hard—there are plenty of fish in the sea. If, however, you learn that it will be difficult, then you need an action plan.

The action plan for a doubtful vendor can go in one of three directions. The first is to help your vendor. If he is having trouble with financing, you can offer to pre-pay part of your order. If he is hesitant to hire a critical worker, you can guarantee a certain sales volume in the year ahead. There may be other ways that you can help, depending on what the vendor’s specific issues are.

If you cannot work things out with your current vendor, then have in-depth discussions with alternative vendors. Verify their quality and performance history with other customers. Analyze whether they will be subject to the same issues that your current vendor is. Learn how fast you could shift your orders to the alternative supplier.

One last approach may work for some companies: consider whether you can eliminate that item from your needs.  For instance, if aluminum extrusions are hard to get, ask your engineers about substitute materials, such as plastics. Alternatives may not be ideal, but if they work and are readily available, they may be the way to go.

Vendor performance cannot be taken for granted in a growing economy, even in one that has been growing sluggishly for the last year.
 

www.businomics.com
“Dr. Bill Conerly is the consultant who connects the dots between the economy and business decisions. He holds a Ph.D. in economics from Duke University and was formerly Senior Vice President at First Interstate Bank.
Dr. Conerly is author of Businomics: From the Headlines to Your Bottomline—How to Profit in Any Economic Cycle (http://www.businomics.com/), which provides business leaders with a framework for understanding current economic news. He is co-author of Thinking Economics, a multi-media high school economics curriculum used in 24 states.”

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