A small business owner’s tips for finding suppliers that help rather than hinder your business, fostering healthy supplier relationships, and renegotiating terms to maintain profitability.
At a glance
Here’s a snapshot of the advice from our interviewee:
- Begin relationships with suppliers by doing extensive research and networking.
- Centre honesty, and strike a balance between formality and informality.
- Be upfront and plan ahead when renegotiating contracts, whether you keep the supplier or move on – it will help things go more smoothly.
- When you’re in a multi-crisis environment, don’t focus solely on cost-cutting renegotiations. Innovate to mitigate losses and find new revenue streams.
In Prospa’s ‘I wish someone had told me that’ series, we speak with seasoned small business owners to hear their advice on growing a business and what they wish they were told along the way. Click here to read the rest of the ‘I wish someone had told me that’ series.
Successfully managing supplier relationships in a challenging business environment is all James Emery has ever known. He co-founded gift delivery company The Neighbours Cellar during the pandemic and is now guiding it through rising inflation.
His experience reflects that of the 22% of Australian small businesses who say that economic and supply chain concerns are the number one challenge they are currently facing.*
James has shared the top tips he’s learned from managing relationships with suppliers.
Starting a business in an uncertain environment
“When the COVID pandemic began I was living with George, a close mate, and a friend of ours was having a birthday. Because it was a weird, tough time we didn’t just want to get him the usual bottle of something, we wanted to do something more personal. So we bought some wine and took off the bottle’s label and stuck on a message we’d crafted. He loved it so much, he kept it. He said it was so thoughtful he never even opened it.
“At the time, George was looking to start a wine cellar while I was toying with the idea of different technology businesses; but both those ideas require a huge initial investment. So we remembered our friend’s personalised wine and thought, ‘Maybe there’s a business there’.
“So George and I co-founded The Neighbours Cellar, which has been operating for three years and has delivered over 11,000 gifts across Australia.”
Supplier relationships begin with networking and research
“Starting a business during COVID was a challenge. We were ecommerce, so didn’t need a retail front, which was good because they were experiencing lockdowns. But, being a startup with very little capital, getting the products was challenging.
“Originally we looked overseas for some items but the minimum order quantities were massive, which we couldn’t necessarily afford. We loved the idea of sourcing locally, so that made it an easy decision. We relied on a combination of networking and research for our initial suppliers.
“Through an old high school connection we found a box manufacturer. For wine distributors, we scoured the web and discovered one that dealt exclusively in Australian wines. They were producing so much wine to ship overseas in a time when that was difficult, so they had a lot of stock on hand.
“Today our basic strategy for looking into new lines is to find through online research and networking at least three viable suppliers for one product. We then communicate as much as possible with all of them to get things started, teaching them about our concerns and process and learning about their products and concerns.
“Once we’ve done that initial communication, we’ll weigh up all the factors, including the quality of the product, the cost and whether our customers will be receptive, and then we make a call.”
Re-negotiations don’t have to be tense
“We had the same gin supplier for about 18 months. The product sold well when we launched, but we soon found we were losing money on every sale.
“We explained this to the supplier. We never want to lower the cost just for our own benefit; it had to make sense for both of us. So we showed them everything and said, we want to work with you long-term, but this is our struggle. They got it, and we agreed on a year-long contract at a slightly lower price, which gave them a guarantee of supply.
“In general, we make sure to do supplier research a few months before a contract ends, even if we love the product like we did with the gin. In this case we contacted about 30 different distilleries to see what prices and lines were available.
“As the re-negotiation came closer, our original supplier told us they had their own issues with the price because of tax increases. We don’t use the tactic of ‘We have another option on the table’, but we had to make sure we hit a certain margin of profitability. So we just said, ‘Look, we’re happy to extend this contract, but we need an extra five dollars off.’
“Unfortunately, we couldn’t come to an agreement, and we went with a supplier that could.
“However, we wanted to maintain open and honest communication, so just recently we sent our original supplier an email saying, ‘Thank you for your partnership, it means the world to us, and we want to keep in touch. Let us know what you develop in the future, but at this time we just needed to part ways as a business decision.’”
Quick tips for managing supplier relationships
“It’s good to keep things fluid and give people information early on, so if we’re losing money on each sale, we let the supplier know pretty soon. Then we tell them we’ll come back later with more information, and we give a more formal, detailed sense of what’s happening. We try to do much of that over email so it’s all documented.
“On the more informal side, we like to send out a gift to suppliers, and we always check in with them on new product lines, what they want to see from us, and whether we can partner on different sorts of projects.
“We also like to offer value where we can. A lot of suppliers appreciate hearing the feedback from our customers. They also like having a sense of the figures: which products of theirs are selling well and which ones aren’t. That can be particularly useful for suppliers that are B2B only, as they don’t have that direct line to consumers.
“One last piece of advice I’d give is to trust your network when it comes to picking suppliers and don’t rely solely on research. We did that once. We found three agencies for an ecommerce function and selected the best one. It was an absolute disaster. The application just didn’t work as it was supposed to and it led to six months of really bad sales.
“Now, whenever we are looking to do anything to do with a large supplier or something technology-based, we always speak to our network and people our network recommends.”
*RFi Australia SME Banking Council, September 2022
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