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The Order Blog is the go-to resource for finance and operations professionals who want to grow their business.

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The order team

It’s tempting to choose the cheapest vendor without considering the outcome. But race-to-the-bottom decision-making can have unintended consequences.

Nearly half (46%) of firms surveyed in Deloitte’s 2020 Extended Enterprise Risk Management (EERM) Third-party risk management (TPRM) global survey believe that “the financial impact of a failure by a third party or subcontractor has at least doubled over the last five years, with a tenfold increase for one in five.”

This potential for breaks in business continuity (and associated costs) is higher than ever. In addition to losses incurred from the vendor disruption, the firms involved likely pay hefty legal, security, and public-relations fees to mitigate damage.

Businesses can prevent third-party risks and reduce long-term spending by conducting a vendor analysis that focuses on quality—first and foremost. Ask the following five questions during vendor selection to ensure vendors meet your standards for quality.

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1. Will the vendor pass a compliance screening?

Third-party fraud is a real risk, and the costs of associating with a vendor that conducts an illegitimate operation can be immense.

Forty-seven percent of the companies surveyed in PwC’s Global Economic Crime and Fraud Survey 2020 said they had experienced fraud in the last two years. Moreover, the cost of these incidents amounted to a whopping $42 billion. These metrics underscore the importance of proactive third-party risk assessment. 

A vendor analysis should always determine whether a current or new vendor complies with the law and engages in ethical business practices. One reliable method of determining vendor risk is to require a completed vendor questionnaire from new suppliers. 

It’s not safe to assume that potential vendors have been vetted for ethical standards because they sell products on a major e-commerce platform. In a 2020 SEC filing, Amazon said it was “unable to prevent sellers in [its] stores or through other stores from selling unlawful, counterfeit, pirated, or stolen goods,” The Wall Street Journal reported. Most e-commerce platforms behave as just that: a platform. It’s on you, as the buyer, to conduct due diligence.

2. Does the vendor share my business’s values?

Vendor relationships with companies that do not share your values pose a risk to your reputation. Avoid public-relations fees and damage to your brand by prioritizing brand values during vendor analysis.

Think about what your brand actively stands for. For example, if your brand is committed to the environment, pay attention to the vendor’s policies around sustainability. Ask about how products are sourced, stored, packaged, and delivered to ensure they meet your brand standards.

The media frequently calls out major brands for engaging in cost-cutting behavior that deviates from their stated values. Nike, for example, was exposed last year for denying payment to sponsored runners when they became pregnant, while simultaneously championing women’s sports in a series of ads. The backlash that followed these revelations convinced Nike to change its policies, but it lost some customers for life.

Don’t end up in the same place as Nike. Partner exclusively with brands whose leadership and stakeholders meet your business needs and share your values.

3. Can the vendor scale with my business?

Long-term financial strength relies on scalability. As a best practice, companies should source all products considered essential to brand identity through a vendor who can scale with the business. Make sure your vendor analysis considers business continuity not just today, but as you grow.

Say, for example, you run a Pilates studio. Your first location is a smashing success, so you replicate this business model and open three more. And then another five. But when you try to create an order for the necessary equipment at the third wave of locations, you learn it isn’t possible. Your vendor can’t support the size of your custom order. Reluctantly, you purchase different equipment from the vendor. However, when it arrives, it isn’t up to the same standard of quality your customers have learned to expect. Disappointed by the changes, your customers fall out of the loyalty loop and begin experimenting with other studios.

The right vendor should be able to support larger quantities of your order if/when your business grows. If it can’t, your ability to offer a consistent customer experience across locations is at risk. In addition, inconsistencies are harmful to your brand roadmap and cost you revenue if they result in diminished customer trust.

4. How will the vendor source my product if there is a disruption to its supply chain?

An out-of-stock item can range from a nuisance to a significant blow to business continuity. Vendors source their products from a wide range of suppliers, who, in turn, have suppliers of their own. During your vendor analysis, ask each vendor about their contingency plans for supply chain management issues to avoid surprises if/when you begin working together. 

The potential for business disruption is immense, especially for manufacturers located in high-risk geographies. Fortunately, many vendors are large enough that they can offer a similar product if yours goes out of stock. 

First, however, you’ll want to know which product they are likely to replace your usual order with. Then, what key differences exist between the two products, and whether there will be additional charges for the swap.

5. Does the vendor provide a high-quality experience?

A vendor that gets your order wrong, or can’t guarantee timely delivery, will end up costing your business.

Let’s say your spa relies on bulk procurement of cleaning products and hand sanitizer. Unfortunately, the delivery arrives a few days late, so you ask your receptionist to pick up some cleaning solution from the pharmacy before his shift. Not only do you now have to make an ad hoc purchase with considerable markups, but you also need to pay your receptionist for their time and process their expense report.

Issues like this do occasionally arise. Life—and weather—get in the way of what we plan, and we have to be adaptable. But what happens if this becomes a recurring issue? And what if, when the delivery does arrive, the order is incorrect? Now your receptionist has to run to the pharmacy and return a package, but your business still hasn’t received its cleaning supplies.

Avoid situations like this by asking the vendor for references who can attest to the quality of the vendor’s services. You can also check out online reviews and scorecard reports on sites like Better Business Bureau. During your vendor evaluation, pay attention to reviewers who comment on the accuracy and timeliness of orders, the quality of products, and the willingness of the vendor’s customer service team to resolve issues quickly. 

Vendor analysis shouldn’t end with a contract

Vendor analysis is one of your most critical business processes. Your supplier lifecycle analysis should feature annual audits to ensure that current vendors remain cost effective. Determine the expected versus the actual costs of a vendor during these audits, adding in any additional fees incurred from using the vendor’s services. 

Examine whether the vendor still meets all relevant use cases and scenarios. You should also assess whether your or the vendor’s values have changed and whether the vendor still meets your compliance standards.

Order’s network of more than 3,000 vendors makes ongoing vendor management easy. We work with each customer to identify strategic savings opportunities, improve vendor performance, implement time-saving automation, and ensure that your supply chain is never disrupted. To learn more, schedule a demo with a member of our sales team.