Wednesday, January 26, 2011

Pre-qualification - Checking References

Similar to why you would do qualification of the Supplier’s financials, checking references can do the same two things in preparation for the negotiation. What you discover can identify the need to add certain requirements of terms to your contract depending upon what you learn. It can also disclose information that you can use during the negotiation as leverage to get the terms you need. For example, if another customer experienced a specific problem with the Supplier, you can bring that up when you are negotiating the term that you have added to help protect against that problem occurring with you.

As part of pre-qualifying a Supplier one of the best things to do is to check references of the Supplier.  There are three types of references that would be traditionally checked:  bank references, trade references and customer references. Bank references would provide you with information such as the Supplier’s available credit line with the bank. Trade references would be from their suppliers and should help identify how they treat their suppliers and how they pay them. Customer references should help identify a number of things such as: What they did; what team was involved, how they performed, what issues or problems arose, and what the Customer would do differently if they were to use the Supplier again.

If you ask the Supplier to provide you with references you can be assured that the ones they provide you will be positive. To get a more representative list, if you tour the facility where the work is performed, make sure you visit their incoming receiving area. That will show you what suppliers they are currently using. Ask to see the final packaging and shipping area and make note of who the products are being shipped to. If the work is being performed at a customer location, ask to see a representative location and look for the same things.

For customer references, always ask to speak with the individual that directly interfaced with the Supplier on day to day issues.  What do you ask them?
  1. What was the scope of the work the Supplier performed for you? A lot of supplier may list major work on their credentials, so its important to understand exactly what they did as they may not have done the work alone or they may have only been a subcontractor.
  2. What type of contract was it done under?  You want to understand if the relationship was similar to what you plan. For example, in construction a Supplier could function as a Construction Manager or a General Contractor and the focus of the two, the skills needed and the risks are substantially different.
  3. When was the work performed? You want to make sure that the work was done recently as work done in the past may not be representative of what their capabilities are today as companies evolve over time.
  4. Who managed the activity for the Supplier? Who were key members of their team. The more critical the personal management of a program is to success the more important this question becomes. What you want to avoid is having the situation where there most successful program was managed by someone who is no longer with Supplier where the skills may no longer exist, or may be reduced.
  5. How would you rank the Supplier’s performance on delivery and meeting the required schedules? Understanding past performance can either identify problem areas that may make you want to avoid the Supplier or the need to add contract tools to help manage their performance.
  6. How would you rank the Supplier’s quality performance. Understanding past performance can either identify problem areas that may make you want to avoid the Supplier or the need to add contract tools to help manage their performance.
  7. How would you rank the Supplier’s contract management performance.  Understanding how well they managed performance and how easy or difficult they were in their dealings will identify the level of resources you may need to manage them.
  8. What was their history of changes? The discussion of changes helps understand the type of supplier they are. If there are frequent and significant of disputes on interpretation of drawings or specifications, you probably don’t want to deal with them as their strategy may be to did low and make their profits back on changes. You also want to know how they respond to Buyer requested changes as that can impact the type of changes provision you may need in your agreement.
  9. What was their performance to Budget or Contract Amount?  This ties closely to the question on changes. It can also help identify the type of contract that you may want to use. For example, if you hired an architect to design a building, you would want them to manage their design to your budget and you probably would want a fee schedule that doesn’t provide them with an incentive to do anything but manage to that budget. E,g, you don’t agree to a fee that is based upon a percentage of cost of the work where their incentive is to drive up the cost to increase their fee.
  10. How did they manage the work? What type of team was assigned? What tools did they use? How effective was their management? Did you need to intervene? How did the team respond to problems? How often did you need to escalate issues to their management? The key to this line of questioning is understanding what the Supplier contributed to the success of the work. Sometimes a Supplier may be successful because the Buyer dedicated substantial resources to manage them and their performance. The more the Buyer needed to manage them the more you need to decide whether you have and are willing to dedicate the same resources or will do better with another Supplier.
  11. Were any claims made or was there any litigation or threat of litigation? This helps identify the type of Supplier they are and what the potential cost of doing business with them would be.  If you are doing to deal with a supplier that frequently makes claims and sues, you need to manage the work differently.
  12. In comparison to other suppliers, how would you rank their performance?  By now you probably already know what their answer to this would be, but I would still ask it as it allows them to volunteer the name(s) of another Supplier that they have had better experience with.
  13. What was the best thing about dealing with them? What was the worst?  What you really want to hear about is the worst as those can be things that impact your sourcing decision or would require you to include terms in your agreement to manage against the “worst” happening to you.
  14. If you could do things differently what would you change?  This type of open ended question allow the individual to provide you with suggestions that you can use in both structuring the terms of the agreement and staffing the work to manage the supplier and their performance. If their response was to not hire the supplier in the first place, you probably should listen to them especially if the work you want the supplier to perform is similar to what they hired the Supplier to perform. If you must use them, the feedback should provide you with significant leverage in the negotiation of the terms where you identify the specific problems or issues and look to them to identify exactly what they will do and commit to that will prevent the issues from reoccurring with your work.

For trade references what you are concerned about is several things:
1.     What is the volume of business they do currently? This gives an indication of their current volume and relationship. Trade references that aren’t current are of little value as much can change in a short period of time.
2.     What type of relationship do they have? This can help identify whether the business is occurring because of a long standing relationship they have with the Supplier (which is what you would prefer) or because of the involvement of another customer where they may be buying off that customer’s contract and may not have a contract that would apply to your work.
3.     What is the payment history.  When Suppliers have cash flow problems the first parties that will suffer is their Supply base. Asking this question provides a more current indication of their financial status than their most recent financial statement. It would also provide an opening to ask they Supplier why? For example if there cash flow problem is the result of customers not paying that can also be an indication of potential problems that are worth looking into.

No comments:

Post a Comment