Supply chain · 14 August 2015

How to avoid the rogue suppliers which can cripple business operation

After completing robust due diligence, you need to protect your business against rogue practices with a detailed contract
After completing robust due diligence, you need to protect your business against rogue practices with a detailed contract

Rogue suppliers are no good for your business and that’s not just because you may end up paying too much for a product or a service. Engaging a rogue supplier can lead to missed deadlines, commitments to your customers and even putting your employees at risk. So, ensuring that you avoid falling foul of them is an important part of the way you do business. There are some key steps to take that will safeguard you efficiently against them.

Before talking about how to protect your business from a rogue supplier, it is important to clarify what is meant by the term.

A rogue supplier, typically, is an organisation that doesn’t consistently intend to supply a product and/or service to your business in the way you want it. In other words, they don’t deliver the right specification, to the right place, at the right time, and at the right (agreed) price.

So, how can your firm avoid rogue suppliers?

The first thing your business should do is ensure that it views suppliers – generally – in the right way. By this I mean your business should look on suppliers as an extension of your organisation. These third party organisations provide the essential goods and services your organisation needs to operate effectively, whether that is the raw materials you need to make your finished goods, the provision of a fully functioning data centre, or the desks and chairs needed for your employees to work at.

Accordingly, you need to ensure you have a robust approach to finding, selecting, contracting and managing the suppliers you need to help make your business work. This will ensure you avoid rogue suppliers.

It has five stages:

(1) What is your requirement?

Before you even start to look for suitable suppliers you need to determine what you are looking for. Ensure that the right stakeholders from across your business are involved in agreeing what the requirement is, making sure what you articulate is detailed enough so as to be easily understood by a third party.

(2) Understand what suppliers are out there for you to work with

With your requirements well understood internally, you need to find some potential suppliers that can meet them. For each discrete requirement your business has, do some research on what suppliers there are and what exactly they do. This research can take several forms. It might be that you have worked with a reliable, high performing supplier in this particular market before.

Or, you may ask for recommendations from your network. You can use the internet to research the market and find some potentially suitable suppliers. Or, you could you use a research company like Gartner to help you identify suitable suppliers. The objective at this stage is simply to generate a list of suppliers.

(3) Select the right supplier

This stage is about due diligence. The right due diligence ensures you can find out everything you need to know about the suppliers on the list that you generated in stage two. This includes financial due diligence: helping you to understand things like how long the supplier has been trading, what its ownership status is, whether it is solvent, if it pays its creditors in a timely manner – all important considerations that will help you root out any potential rogue organisations.

Also included is operational due diligence – helping you to understand how each supplier operates, what facilities and equipment it has, how many customers, what sort of growth plans are in the works and how it contributes to the communities in which it operates.

The selection process you choose to follow can be very prescriptive if you wish with requests for information and requests for proposal. If you operate in the public sector you have to follow this process adhering to strict timescales, but irrespective of the process you choose, it’s key to avail yourself of as much information as you need to give you confidence that the suppliers being assessed are bona fide organisations, with track records of successfully supplying other businesses like yourselves.

The due diligence stage is also a time when you can meet your favoured suppliers from the list you created. This is a great opportunity to ask them detailed questions about what they do and how they would help your business if they were to win your contract. You can also ask for references.

(4) Negotiating an effective contract

The fourth stage of avoiding rogue suppliers is to negotiate a thorough contract with the supplier you select. After completing robust due diligence, you still need to protect your business against rogue practices and/or behaviours. So, make sure that the contract you sign clearly outlines the product and/or services you and the supplier have agreed on. Then make sure the contract clearly states what recourse you have in the event of the supplier not consistently delivering what it is contracted to. Beyond that, there are a number of key inclusions to the contract you sign, some of which are:

  • The rights you have to terminate the contract
  • How the supplier must treat confidential information
  • Under what circumstances – and how – the supplier can use subcontractors to provide any of the products and / or services being supplied to you. If your suppliers want to do this, it is important to hold them accountable for not engaging rogue suppliers themselves
  • The liability the supplier will assume in the event of something going wrong
  • What information the supplier must provide to you during the contract (so you can accurately judge its performance)
  • A detailed escalation and dispute resolution process
  • What rights you have to audit the supplier including site visits

(5) Manage the supplier properly – and let them manage you too

Ensure that you keep the contract alive. In other words, don’t let it sit in a drawer gathering dust, but use it to help you manage the supplier. Is it consistently providing the products and services as set out in the contract? Is it fulfilling all of its obligations? And are you having the right conversations if not? And, finally it shouldn’t all be one way. A good supplier will want to manage you too, for example by coming up with ideas as to how it can improve the service it provides your business. A good supplier will be an expert in its field so you should be open to listening to their ideas.

Simon Dixon is the managing director of supply chain and logistics advisors Hatmill.

Image: Shutterstock

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Simon Dixon is the managing director of supply chain and logistics advisors Hatmill. He has worked in supply chain management for the past 19 years, both in industry and in consultancy. Simon's client experience includes the top four UK supermarkets and over 50 other clients spanning sectors such as construction and ecommerce.