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Vendors and

4 September 2005

Q- I am planning on starting a new retail business and there are so many possible vendors. How do I select vendors and when will I be expected to pay them?

Vendor selection is critical because vendor selection determines the products you will stock. You will be known for your products, so must do a great job of this, especially in the beginning of your business. You want to make sure that any product you carry matches up to the quality, variety, and image that you want for your business. For example, if you are in the gourmet dog food business, carrying products the local grocery store carries will not differentiate you from your competitors. Your products must set you apart and that's why vendor selection is huge in retailing.

Some of the general items to look for when selecting a vendor are quality, delivery and service. You can check into these by asking other retailers that carry the products. Vendors who do not operate in your geographical area are usually happy to answer questions about vendors. Try to get as much information as possible from other retailers because this is so much better than paying any attention at all to what the salesman says. Going to a trade show in your industry and talking to as many people as possible is another great way to do research on potential vendors.

In retailing you will be walking the tightrope of having too much inventory or too little. You do not want to have too much because this will exhaust your financial resources and having too little means that you might run out of product and have what is called a “stock out." A stock out is not having the inventory necessary to service the customer. Stock outs drive customers to your competitors.

Another factor in vendor selection is the vendor's return policy. If goods are defective, how long does it take to replace items and who is going to pay the shipping? Try to find a vendor who agrees that, if goods are not selling, you receive credit on those items so that you can purchase other items from the vendor that will sell much more rapidly. When you start a business, it is so hard to predict which items are going to be your high sellers and which are not.

A great way to test the marketability of new product is to see if the vendor has any "broken" cases. A broken case will enable you to buy smaller amounts of a product at a slightly higher price to test the marketability of a new product.

The final concern when selecting a vendor is the terms or payment schedule. The longer the vendor will give you to pay, given the quality of product is great, the better. The longer you have to pay, the fewer dollars you will need to run your business. However, most credit terms are net 30 which means that you must pay for the goods within 30 days of receiving the bill. Sometimes, you might see the terms listed as 2/10 net 30. What this means is that, if you pay for the goods within 10 days, you can reduce the bill by 2 %( which is called the discount), but, if you miss this date, then the whole bill is due in 30 days. You might think that 2/10 net 30 is just 2%, no big deal. However, if you work this out for an entire year the cost for not paying in the 10 day grace period is over 36% annually. This is a very expensive source of funds.

Selecting vendors is one of the most critical things a business can do, so diligently check them out!