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Business Vendor Selection: 6 Considerations in 2021

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Susan Guillory

Susan Guillory

Updated June 9, 2021
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Business Vendor Selection: 6 Considerations in 2021; Choosing your business' vendors and distributors is a tricky process. Here are six factors to consider to help you narrow down your vendor selection.
You rely on vendors for your materials, office supplies, and inventory, so vendor selection is an important decision. The vendors you choose to work with can determine how much you spend, the quality of the products you produce, the timeliness of your shipping, and, ultimately, the profitability of your business. In this article, we’ll cover six criteria to keep in mind when you’re selecting vendors for your business needs.

What Are Vendors?

Vendors are the businesses that sell what you need, whether that’s material to create your products or paper for your printer. You can only get so far with your new business ideas alone. You need help (and physical items) to make your ideas a profitable reality.As you start researching different vendors, it’s easy to become overwhelmed with all the options out there. But vendor selection should be a carefully-made decision to ensure you get exactly what you need at the best price. It can help to boil it down to specific criteria you want to look for. 

Six Criteria for Choosing Vendors

One of the best tips for starting a small business is to find vendors you like working with. They should be reliable, trustworthy, and affordable.As you start the process of vendor selection, tune into what you’re looking for, since every vendor will provide something slightly different. One may offer the lowest price but a less quality product. Another may offer great pricing and quality, but take longer to ship. It’s all a matter of where your particular priorities lie.

1. Your Needs

Start by identifying what you need. If you sell physical products, do you want to purchase them already made from a manufacturer or wholesaler, or do you plan to create the products yourself? In the case of a retail garment business, you would likely buy the clothing already made. But if you create custom bath bombs, you’ll need one or more suppliers to provide the raw materials, like bath salts, scent, and packaging.

2. Quality

One of the most important supplier selection criteria is the quality of the products. You likely already know your target market and approximate product price point. This information can guide you to the level of quality you should seek from a vendor.If you’re catering to the luxury market, you’ll want a vendor that can supply top-of-the-line materials or finished products. If, on the other end of the spectrum, you’re targeting the budget crowd, you’ll probably want to find the lowest price that still offers decent quality.

3. Pricing

The more you pay per item, the lower your profit margin. A rule of thumb for inventory is to allow between 17 and 25 percent of your budget to it, though that can vary by industry. Keep in mind that your product profit margin includes more than just what you pay for the materials or product: it also includes the labor it takes to create or package the product. You can always raise your prices to keep a good profit margin, but then you risk turning off potential customers if they can find a similar product for less elsewhere.Some vendors may offer discounts if you buy larger orders, so if you can afford to buy more at once, you could end up paying less per item. This could make sense if you know your sales volume and are confident that you can sell the products fast enough to cover that investment.What vendors charge can vary greatly, so shop around.

4. Speed of Delivery

You may find great prices from vendors located in, for example, China, but be sure to weigh all the criteria carefully. It may not do you any good to save on the products you buy if it takes months for the shipment to arrive.Particularly if you need frequent deliveries or if you order fresh products (like food), it may be smart to work with a vendor in the area where your business is located to ensure that orders arrive on time and don’t jeopardize your business’s ability to sell.

5. Vendor Reputation

With so many options for vendor selection, you may be inclined to go with the cheapest and fastest option. But it may be worth doing a little digging to see what people are saying about that vendor. You can start with the Better Business Bureau, but additionally, a quick search for reviews for that company can net results that show you what other people think about working with that particular vendor. If there are any instances of fraud or negative customer experiences, think twice before buying from that company. You might also be able to reach out to any business organizations you may belong to or other businesses similar to your own to see if they can make any referrals.

6. Minimum Order Requirements

Some vendors have what’s called minimum order quantities. This is simply a threshold requirement of how many units you must purchase for an order. Sometimes the number may be in the thousands of units. This may or may not make sense for your business. If you sell, for example, thousands of bracelets online, buying thousands of jewelry clasps might not be a problem. But if you sell only a handful each month, this probably won’t work.You can always ask a vendor if it’s possible to negotiate that minimum order quantity. Sometimes you can do this and just pay more per unit. If not, keep looking.

How to Find Vendors

First, you may want to consider what kind of vendor you need. If you’re looking to source materials or products, think about whether you would prefer to buy directly from the manufacturer or from a wholesaler. A manufacturer may be a great option if you’re looking to customize your products. They may be cheaper to work with, but usually they’re located overseas, which may be inconvenient. A wholesaler buys from a manufacturer, which means that you may end up paying a little more if you use one. But it may also be easier to work with a wholesaler, and you may be able to find one located in the U.S., so you can get your items faster.When it comes to vendor selection, a good way to find quality vendors is by referral. If you’re involved in industry associations or online business groups, ask if anyone has a recommendation for whatever you’re trying to buy.You might also connect with vendors at an industry trade show, where you can meet with representatives face-to-face to learn about what each vendor can offer your company.And there are also online B2B marketplaces where you can find anything at all, from clothing to pet supplies. Minimum order quantities may vary.When you’re looking for something simple, like office supplies, you might consider local vendors who can quickly deliver whatever you need. 

Choose Your Vendors Carefully

The key to vendor selection is to shop around. You may want to request samples or even make a few small test orders of the same items from different vendors. Then you can compare the quality of the goods and the experience of working with each vendor.One tool you may want to use when you’re choosing among several vendors is a Request for Information (RFI). In an RFI, you ask a potential supplier general information about the products and/or services you’re interested in. As the name suggests, this is simply a formal request for information, not a contract or an agreement, but it can tell you a lot. Ideally, you should try to construct your request so that it will be easy for you to compare the most important answers from your leading choices. Finally, as you’re narrowing the field, don’t be shy about asking a prospective vendor for a discount. The vendor should want to earn your business and build a long-term relationship with your company. It may be able to lower what you pay if you plan to make repeat purchases.If you’re planning to seek funding or apply for a bank loan, include your vendors under Key Partnerships in your business plan, since potential investors may want to see who you work with.

The Takeaway

Making a careful selection among available vendors can be a time-consuming process. But taking the time and making the effort to find the right sources can ultimately benefit your business and your bottom line. Just remember: vendor selection isn’t carved in stone. As your business grows, its needs may change. Regularly review what you’re paying and what you’re getting. If it feels like the right time, see what else is out there. Finding the best fit for your company’s needs should always be a priority, and that may mean changing suppliers from time to time.Whether it’s for inventory or for other reasons, you may reach a point at which you find your small business would benefit from financing. In that case, Lantern can help. By filling out just one application, you can access an entire network of potential lenders who may be able to help.
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC21037

About the Author

Susan Guillory

Susan Guillory

Susan Guillory is the president of Egg Marketing, a content marketing firm based in San Diego. She’s written several business books, and has been published on sites including Forbes, AllBusiness, and Cision. She enjoys writing about business and personal credit, financial strategies, loans, and credit cards. Follow her on Twitter @eggmarketing.
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