From the course: Corporate Finance: Profitability in a Financial Downturn

Prioritizing your vendors

From the course: Corporate Finance: Profitability in a Financial Downturn

Start my 1-month free trial

Prioritizing your vendors

- When you're looking to boost the profitability of your company, one of the most important things you're doing when cutting costs is to know what you're willing to cut, what you're willing to lose, and what you're not. One of the areas where this is critical is with vendors. You need to know which vendors you're willing to negotiate with and which ones are priorities, you need to go a little softer on. Before you can do that though, you have to rank your vendors, score your vendors, and compare them against each other. There are several different ways that you can rank and prioritize your vendors using a scorecard. This includes looking at attributes that are important to you for a vendor, things like cost but other things like consistency, reliability, speed, payments terms. All of those things factor in as important parts of a full vendor picture. Remember, you're not just looking at cost when it comes to a vendor. It's important to also look at the value that a vendor brings in their entire performance. When my company uses vendor scorecards to rank a company's performance, we're looking at two important pieces. The first piece is weighting the different attributes that we're assessing a company by. This means looking at their speed, looking at their consistency, their reliability, their payment terms, and their cost. We weight those on a one-to-five scale. Then we look how well do they perform on those categories. Not just what's important, but how do we weight them on a 10-point scale? We multiply each of the attributes together to get a number. We add up those numbers, and that's the score value for that vendor. Once we've done that for each of the vendors, we have a way to compare them to each other. And we know which vendors are at the top and which are at the bottom. It's interesting because sometimes you find a vendor that a client might've thought was in the middle of the pack is actually the best and most important. And sometimes, ones that they thought were really important are in the middle or maybe even at the bottom. It depends on how the attributes are weighted. You want to use scorecards because it gives you objective data. Yes, you're using questions that are a bit subjective. But in the end, you have numbers you can rank against each other, and you know which vendors are most important. As with any other part of trying to boost a company's profitability, you want to to get to numbers and data that people can agree on in order to get buy-in as you take actions and make the cuts that are necessary to boost profitability.

Contents