Procurement and the supply chain: what a business buys and where it comes from

1. A sandwich shop sits at the end of a chain that runs farmer, flour miller, bakery, wholesaler and shop, and because the customer blames the shop for a stale sandwich rather than the miller, the business at the end carries every mistake made further up.
2. Choosing a supplier is therefore not only buying goods, because you are also buying that supplier's reliability, its quality and its willingness to help when something goes wrong.

What a business wants from a supplier, and why each one matters

1. Procurement weighs six things when it picks a supplier, and each one protects a different part of the business.
   1. Price: a lower cost per unit leaves more of the selling price as profit, or lets the business undercut a rival without losing money on every sale.
   2. Delivery on time: stock that arrives when promised keeps machines running and shelves full, and a short lead time lets the business reorder quickly instead of sitting on weeks of stock.
   3. Consistent quality: inputs that are the same every time keep the finished product the same, which cuts returns, complaints and the cost of remaking work already paid for.
   4. Availability: a supplier able to raise the quantity it sends when demand rises lets the business grow or handle a busy December without hunting for a second source in a hurry.
   5. Trade credit: being given 30 or 60 days to pay means the goods can be sold and the cash collected before the invoice falls due, which eases cash flow in a way a small discount does not.
   6. Early communication: a supplier who warns you on Monday that Thursday's delivery will be short gives you three days to find an alternative, while one who says nothing leaves you with an empty machine.
2. Greggs sells cheap hot food in high volume across its high-street and retail-park shops, so its suppliers have to deliver fresh stock to every shop every morning and at a low enough cost for a sausage roll priced at a couple of pounds still to make money.

Why the cheapest supplier is often not the best

A clothing business that buys 2,000 plain shirts a month to print on asks three suppliers to quote, and the quotes differ in far more than price.

1. Supplier A is 40p a shirt cheaper than B, saving £800 a month, but 12% of its deliveries arrive late and a late delivery leaves the printing machines idle while the staff are still being paid.
2. A fault rate of 6% is about 120 shirts a month, and a flaw noticed only after printing wastes the shirt, the ink and the labour that went into it.
3. If even half of those 120 shirts reach customers, the refunds at the £18 selling price come to £1,080, more than the £800 saved, so A turns out to be the dearest supplier once the whole cost is counted.
4. Supplier C costs most per shirt but allows 60 days to pay, so a business short of cash can sell the printed shirts and collect the money before C's invoice falls due.

Trust: what a long relationship gives you that no price list shows

1. A supplier that has been paid on time and given steady orders for years treats the business differently from a new customer chasing the lowest quote.
   1. Priority and flexibility: when materials run short the loyal customer is served before a new one, and an urgent extra order is squeezed into the delivery round.
   2. Better terms and early warning: as trust builds the supplier extends the time allowed to pay and says a price rise is coming before it lands, so the business can order ahead or change its own prices in good time.
   3. Joint improvement: a supplier that knows the product well suggests a cheaper material or a stronger component, because its own orders grow when the buyer sells more.
2. Depending on one supplier is risky, because a business with no alternative cannot walk away if that supplier raises its price, misses deliveries or goes out of business altogether.
3. Many firms therefore split orders between two or more suppliers, accepting a slightly higher price per unit as the cost of always having a second source.