Suppliers. Vendors. Third Parties. They feel the same, but they’re subtly different. Suppliers are in a ‘chain’ of supply, or a ‘supply chain’. Vendors are the last link of that chain. Third Parties enter a relationship with you (as the first party) to help provide a product or service to a customer (second party) – sub-contractors of third parties are known as fourth parties. Whichever terms you choose, understand them and use them in the right context.
Let’s focus on that relationship with a potential supplier. You will want to run some background checks – are they registered with the Companies House in your territory, how long have they been trading, who owns them, what is their reputation like? There are many different checks you can apply, depending on how long you want the relationship to last, and how much you want the third party to manage on your behalf. Outsourcing arrangements, for example, require thorough due diligence if that third party is going to be acting on your behalf. Whereas a one-off purchase may just require a check on the timeliness, cost and quality of the third parties’ products or services.
Ideally, relationship is documented in the form of a contract. You’ve included the exact description of what you want to buy, when you want it, how long for, how you’re going to pay for it, who you’re going to pay and when. A contract can be as simple or as complex as you need it to be, as long as there are three elements in play: 1) an offer to buy a product or service, 2) an acceptance from the third party that they can supply it to the agreed requirements; and 3) ‘consideration’, something of value given to someone in return for goods, services, or some other promise. Without all of those elements, it’s not a contract.
Here are some other things you will want to consider:
1.Identification – making sure you know exactly who you’re dealing with, where they’re registered and what trading name they are using (if relevant)
2.Third Party Relationship – how would you categorise the supply? Transactional? Bespoke? Strategic? Try and build a view of all third parties you use and why
3.Performance Management – what exactly is being supplied? What constitutes acceptable supply? Can you measure that supply and keep an eye on it? Are any processes you share with a supplier documented and followed? How would you know if they weren’t being followed?
4.Payment/FX – how are you paying the supplier? Is it pro rated or based on delivery milestones? Are they overseas, where currency values might fluctuate?
5.Risk – how much uncertainty (in reaching your objectives) are you placing with the supplier? What is the level of dependency? Can the supplier help mitigate risk?
6.Compliance – are there any regulatory or reporting aspects to the supply, e.g. data protection, industry-specific regulations, health & safety, equality/human rights?
7.End-customer requirements – have you agreed with your customer(s) to flow-down their requirements to any third parties you want to use?
8.Cashflow – are the payment terms you agree with your suppliers the same or better than the payment terms you agree with your customers?
9.If something goes wrong – do you have an escalation route agreed; or the necessary warranties, limitations on liability or waivers in place to protect your business? Do you have a business continuity plan for your most essential customer products or services?
10.Confidentiality – do you need to protect the confidentiality of any shared information, e.g. intellectual property, before during or after the period of supply?
As you can see, there is a lot to think about. Essentially, a contract is a written description of your engagement with a third party, so think about the type of engagement you want from the start.
Categorise it, decide if you have a preference to use that third party if you can, and why. Be prepared to spend time monitoring and managing each third-party relationship according to the level of dependency you have on the supplier.
Do not forget that suppliers can also be very dependent on you – if your business represents more than 25% of a supplier’s turnover, and you want to go elsewhere, there is a real chance you could put that supplier out of business. If you have a scenario like this, keep close to the supplier and stay prepared.
All your third-party relationships should be documented, ideally in a Contract Management Library. Keep a note of all the milestone dates, for example: deliveries, renewals, payment dates, etc. and ensure that notifications of company name/location etc. changes are tracked.
If you have an accountant, they should be your first stop for business advice. If you don’t have an accountant or they can’t help, BuBul has a wide range of experts available. For more advice, contact our expert* Michael on LinkedIn.
*We’ve picked experts we know and trust who are good at what they do. All of them will give you at least an extra 30 minutes free advice if you contact them and would then charge their normal prices. They don’t pay to be on BuBul and don’t give us any money from anything they earn as an expert.