Office Address
18/09, Block B, Bosila City R/A
Mohammadpur, Dhaka - 1207
Phone Number
+880 9638 667701
+880 1711 871722
18/09, Block B, Bosila City R/A
Mohammadpur, Dhaka - 1207
+880 9638 667701
+880 1711 871722
by Shah Nawaze Pavel
There is a profit leak that is draining your business. This profit leak is a problem for your business. Your business is losing money because of this profit leak. The silent profit leak is something that you need to know about so you can stop it from draining your business.
You bought materials that were worth a lot of money, ten lakh to be exact, last month. The raw materials you ordered were really expensive, costing ten lakh.
The company was supposed to get materials for 2 lakh, but these materials did not arrive when they were supposed to. This caused a problem because the production had to be stopped. The 2 lakh worth of materials were really needed to keep the production going. Since they did not arrive on time, everything came to a halt.
1.5 lakh worth of goods were so poor in quality that they're unusable.
The company bought another one lakh worth of stuff at prices that were twenty percent higher than what you would pay for them in the market.
Total loss: Approximately 4.5 lakhs.
This is not made up. Lots of medium-sized factory owners and businesses in Bangladesh lose money every month. They do not even see it happening. The main problem is that they do not manage their suppliers well. The problem is supplier management with these small and medium-sized factory owners and businesses in Bangladesh.
Managing suppliers is not just about making phone calls and placing orders. It is like the blood that keeps your business alive. If something goes wrong with your suppliers, your entire business will be in trouble. Today, we will talk about the mistakes people make when they deal with suppliers, and these mistakes can be very bad for your business. We will also talk about how you can fix these mistakes and save a lot of money every month, like thousands of rupees. Supplier management is very important. We need to take care of it. Bad supplier management can hurt your business badly, so we need to be careful and find good solutions to these problems.
First, you need to know who your enemy is. The question is, are you the one making these errors with the enemy, the enemy being the things that are causing you problems, the things that're your enemy?
I have been buying fabric from Karim Bhai for a while. The thing is, Karim Bhai charges a lot more money than other people. Sometimes the fabric does not arrive on time. I prefer not to look for new suppliers of fabric because it is a lot of work.
One day, Karim Bhai tells me that he is going to close his shop. This is a problem for me because my whole production line stops working for almost a week.
I have to find a person to buy fabric from really fast. This means I have to pay a lot of money for the fabric. I also have to spend time getting to know the new supplier, which is what I was trying to avoid with Karim Bhai. I have to do all of this work with the supplier just like I did with Karim Bhai.
The Cost Calculation:
1 week of halted production is equal to approximately 5 lakhs in lost sales.
Emergency purchases at higher prices equal an additional 50,000 expense.
Total Estimated Loss is 5.5 lakhs.
The Problem: You find a supplier who is giving you a 15% discount on the things you buy, which is cheaper than what you normally pay. So you decide to place an order with this supplier. The goods finally arrive. Something is not right with the goods that the new supplier sent you.
The quality of the material is really bad. This means we have a lot of waste when we are making things. In fact, the raw material quality is so bad that it causes 25% wastage in production. We are talking about the raw material quality here. The raw material quality is the main problem.
The finished product quality drops, leading to customer returns.
You think you are getting a deal when you buy something cheap. In the end, that cheap thing is going to cost you more money. Your cheap purchase ends up costing you more.
The Cost Calculation:
When you place an order for one lakh, you get to save fifteen percent. These fifteen percent savings, on a one lakh order is actually fifteen thousand. So you save fifteen thousand on a one lakh order.
But 25% higher material wastage is equal to 25,000 loss.
Customer returns and brand damage are equal to Priceless (at least another 20,000).
Net Result is 30,000 LOSS (versus the perceived 15,000 savings).
The problem is that you call your supplier and say, "I need 50kg of yarn by 10 AM tomorrow at the price." Your supplier says "Okay," but then the yarn arrives late at 4 PM. They only bring 45kg of yarn. To make things worse, the price of the yarn has gone up.
You cannot do anything about it because you have no proof of what you agreed on. There is no written record, no Purchase Order, nothing to show what you ordered. You just have to deal with the yarn that arrives, even though it is not what you wanted, and you have to pay the price for the yarn.
The Cost Calculation:
We had a production delay. That meant we had to pay overtime to the workers. The production delay was a problem, and it cost us a lot of money. We had to pay 10,000 dollars because of the production delay and the overtime. The production delay was really expensive for us.
We have a problem with our order. The thing is, we did not get the stuff, so our batch is not complete. This means that 20,000 orders are going to be late. We are talking about the orders that were supposed to be delivered on time, but now they are delayed because we do not have enough things to send out. The incomplete batch is really causing problems for us. It is all because of the short supply.
Total Loss: 30,000 with a lot of mental stress.
The problem is that you have a lot of faith in your supplier. You believe in them so much that you do not check the electronic components they send before you put them away.
This month is an example of what can go wrong. Your supplier sent you 200 components. When you looked at them closely, you found out that 40 of these electronic components were not good. You only found this out when you were using them to make things, which was too late. You should have checked the components before you started using them.
The Cost Calculation:
The value of 40 defective units is equal to 40,000.
The cost of halted production line and restarting is equal to 15,000.
The supplier is saying that they will not take responsibility for this problem. They are claiming that you are the one who damaged the things they sent. The supplier now says that the damage to their things is your fault.
Total Loss: 55,000 + material waste.
The problem is that your relationship with suppliers is basically about buying and selling. You do not get any treatment like a greeting card during Eid or Puja. When you really need something, the suppliers do not make you a priority. This is especially true when there is a shortage of something in the market. At that time, the suppliers help their customers first. The relationship with suppliers is like this: they do not care about you when you need them the most. You are at the bottom of the suppliers list when it comes to getting what you need.
The Cost Calculation:
When the production stops because of a need, the company loses around one lakh every single day. This is a big loss for the production team. The production team faces a loss of one lakh per day when production is halted due to a need.
When you do not have relationships, you are missing out on the ability to negotiate and get what you want because good relationships give you that power. Good relationships are really important for negotiation. They help you get what you want from the person because you have a good relationship with them.
Loss: Direct financial loss with long-term strategic disadvantage.
Now, let us build the solution. We need to follow these steps carefully. The solution is what we are trying to build, so we have to take our time and do things right. We will follow the steps for solution one, one by one.
This means we should not rely on one supplier for everything. It is like the saying do not put all your eggs in one basket. If something happens to that one supplier, we will be in trouble. Supplier Diversification is important because it helps us to be safe. We need to have suppliers for Supplier Diversification. This way, if one supplier has a problem, the other suppliers can still help us. Supplier Diversification is an idea.
What to do: Maintain at least 2-3 approved suppliers for each critical raw material.
Why it works: If one thing fails, the other things can keep you running. This is because you have options. It also improves your negotiation power with the things you are dealing with. The things you have give you control.
How to start:
Identify 2 new potential suppliers for your key materials.
I want to get some samples of the product. I also need to get quotes for it and find out what the terms are for buying the product. I need the samples, quotes, and terms for the product.
Place small trial orders (20-30% of your need) to test them.
Build a regular supplier network with the best performers.
The price of something is not the same as how much it costs. You have to think about the Total Cost of Ownership of the thing:
TCO = Purchase Price + Transportation Cost + Quality Failure Cost + Delay Cost + Inventory Holding Cost
An Example:
Supplier A: Price 100/unit, 99% on-time delivery, 98% quality pass rate.
Supplier B: Price 90/unit, 70% on-time delivery, 85% quality pass rate.
When you are dealing with B, there are some costs that you might not think about at first. These hidden costs include things like when production has to stop, handling waste, and having a lot of safety stock.
The Smart Choice: Supplier A, despite the higher unit price.
We need to make sure we have a purchase order for every single order we place. This purchase order must have some details.
Here is what the purchase order should include:
Detailed product description & quality specifications
Quantity
Unit price & total value
Delivery date & location
Payment terms
Use Digital Tools: Create a PO template in Google Sheets or Excel. Print it or send a PDF via email/WhatsApp for every order. Ask the supplier to sign and return it.
Goods Received Note system: We need to set up this. It means that someone from our team has to check the goods before they are allowed into our warehouse. The person in charge has to make sure everything is okay with the goods. We are talking about the Goods Received Note system, so this step is very important for our Goods Received Note system.
The Goods Received Note system requires someone to inspect the goods
This person has to do the checking before the goods enter our warehouse. It is a part of our Goods Received Note system.
We have to do this to make sure our Goods Received Note system works properly.
Use random sampling: When you are dealing with a group of things, it is a good idea to use random sampling. This means you should check some of the items, like 10 to 20 percent of them, but pick them randomly. If you find any problems with these items, then you should not accept the group, or you should ask for a lower price for all of them. Random sampling is a way to make sure that the items you get are okay, and it can help you with random sampling of large lots of items, like the ones you have to check.
To make sure our products are good, we should have a list to check them. This list should be different for each type of product. For example, we need to check the color, weight, and dimensions of a product. We also need to check if the product works properly.
Quality Check: Our staff can just put a tick in the box for each thing they check. This way, we can be sure that our products are okay before we send them out. We will have a checklist for each product type, like color, weight, dimensions, and functionality. Staff will just tick the boxes for each product type, such as color, to make sure everything is alright.
Grade your suppliers every quarter or half-year on four key metrics:
On-Time Delivery (OTD): A grade for 95%+.
Quality Acceptance Rate: A grade for 98%+ good quality.
Price Competitiveness: Compared to market benchmarks.
Communication & Problem Solving: Support during crises.
Award more business to 'A' graders. Issue warnings or phase out 'C' and 'D' graders.
It is about going beyond just doing transactions with other companies.
View your supplier not just as a vendor, but as a business partner.
Maintain Regular Communication: A monthly check-in call just to connect.
Small things like a box of sweets during Eid or a calendar for the New Year can really make people happy and create goodwill. When we give someone a box of sweets during Eid, it shows we care about them. It makes them feel special. The same thing happens when we give someone a calendar for the New Year. These small gestures, like giving a box of sweets during Eid or a calendar for the New Year, can bring people together and make them feel good about us and about holidays like Eid or the New Year.
So you should tell people about your plans. Let them know what projects you have coming up and what materials you will need for the 6 months. This way, they can get ready and help you out when you need it.
Come Prepared with Data: Know market prices and quality standards before negotiating.
Offer Long-Term Contracts: In exchange for price stability or discounts, offer guaranteed business for 6-12 months.
To make things work out well for both of us, I can say something like this: I want a price, but I can pay you within 15 days instead of 60. This is a deal for them because they get their money faster. They will have a cash flow situation, which is what the other person, in this case, the seller, really needs. Create win-win scenarios like this one, where the seller gets a cash flow, and I get a better price.
You do not need software to get started with the software. The software is not the thing you need to begin with.
You can start making a list of your suppliers and keeping track of your purchase orders. How well they do in Google Sheets or Excel. This is a place to begin because it is easy to use and does not cost anything. You can use Google Sheets or Excel to make a database of your suppliers, record your purchase orders, and track how well they perform.
I think it is an idea to use WhatsApp Business or Messenger to create separate groups for each key supplier. This way, I can share all communications and files with them in one place. It is really helpful because it maintains a record of everything, so I can easily look back at what was said or shared. This makes it a lot easier to keep track of things with each supplier.
Basic Accounting Software: Use Tally or similar software to maintain supplier ledgers and track bill payments.
Cloud Storage: I need to make a "Suppliers" folder on Google Drive. Then I will upload copies of all the purchase orders, quality reports, and contracts to the "Suppliers" folder on Google Drive. This way, I can easily get to the purchase orders and other documents when I need them.
The Situation: Farhan Garments had a budget of 20 lakhs for fabric every month. They were losing a lot of money, about 3 lakhs every month. This was because they got deliveries late, the fabric was often defective, and they could not get fabric when they really needed it urgently. Farhan Garments were facing problems with their fabric supply, such as late deliveries of fabric, defective fabric, and not having fabric when Farhan Garments needed it urgently.
He looked at the performance data for all the suppliers over the year. This data was for one year. He wanted to see how all the suppliers did during that time. The performance data for all the suppliers was what he was looking at.
Listed the worst performers.
The man brought in two suppliers. He got two suppliers to work with the company. The two new suppliers are now working with the company because of him.
Created a simple PO format and mandated its use for every order.
Implemented mandatory pre-warehouse inspection for 10% of all fabric.
Graded his three main suppliers as A, B, and C based on performance.
Invited the 'A' grade supplier for dinner and proposed a long-term contract.
I told the supplier who got a 'C' grade that we would have to stop giving them orders if the supplier did not do a job. The 'C' grade supplier needs to improve their performance. We will not give them any more orders.
The monthly losses have really gone down. They used to be three lakhs, but now they are under twenty thousand. This is a change in the monthly losses. The monthly losses are much lower now.
We get orders very quickly now. These urgent orders arrive within 24 hours. This means you will get your orders in just one day.
Quality issues reduced by 70%.
The relationships he had were really strong. This became clear when there was an increase in prices. His main supplier did something nice for him. They kept the prices for the first three months. This was a help to him because of his relationships with the supplier. His main supplier was willing to work with him because of their relationship.
Big change does not happen overnight. You have to start with these steps:
This Week: Sit down with your most problematic supplier. Openly discuss the issues and agree on a timeline for improvement.
Tomorrow: Create a simple PO template in Google Sheets. Start using it for your very next order.
Today: Give each of your suppliers a performance grade (A, B, C, F) for the last 3 months.
This Month: Find at least 1 new alternative supplier for your main raw material and get samples.
At Your Warehouse: Designate one employee for quality checking duty. Give them a basic checklist.
Managing suppliers is really about two things. It is about numbers and systems and things we can measure. Managing suppliers is also about people and how we get along with them, and if we can trust them to be with us for a long time. Supplier management is like that because it deals with supplier relationships, supplier trust, and supplier thinking for the future.
If you have read this far, you are already aware of what needs to be done. Now you only need to take action on the things that you know.
Remember, your suppliers are very important. If your suppliers are strong, your business will be strong too.
If your suppliers are weak, then your business will have a problem because of those weak suppliers. Your business's primary weakness will be those suppliers.
Stop the monthly lakhs in losses. Invest the lakhs you save back into growing your business. The decision is now yours.