Vendor Development

Vendor Development has to do with creating or making new vendors (and not selecting out of the already established ones in the market). This is a continual and an important activity of the Purchasing Manager and in large organizations there is exclusively a Vendor/Source Development manager. Traditionally one of the reasons for developing new vendors is to build more competition in the supply market (eliminating monopoly or oligopoly). The company can then buy a material from a number of sources. Another traditional reason for such multiple source buying (and, therefore, also for vendor development) is to spread the risk of non availability or shortage of input materials over a number of suppliers. In case, one of the supplier’s employees go on strike (or if there is an explosion or fire in the supplying company), the other suppliers can be relied upon to compensate for the shortage. Therefore, in traditional organizations, which most Indian organizations are spreading risk over a number of suppliers is the main motive behind vendor development.

However, international standards are premised on the thinking that single source buying provides some advantages which multiple source buying does not. One of the obvious advantages of single source buying is that of close rapport between the two companies and the loyalty established with the supplier. This goodwill might yield benefits in a number of ways in times of difficulties or crisis for the buying company. Also, the supplying company might even do some information gathering work of the buying company and therefore, keep it appraised of the recent market trends (what may be termed as intelligence information). Reliability, lack of uncertainty, quick and faithful response to the needs and, therefore, a general improvement in quality and reduction in inventory and purchase related costs are the long term benefits for both organizations. However, the present Indian situation is far away from such world class thinking. In the present socioeconomic milieu prevailing in our country, where trust and concern are found somewhat wanting the Indian companies seem to find more advantages in multiple source buying. But still the choice between single source or multiple sources buying is quite situational. Vendor development can be seen as an attempt to get the advantages of both spreading risk, building competition and at same time establishing a good rapport. Vendor development involves helping or building up the vendor by various means such as:

1. Lending money for part of his capital equipment, working capital requirements etc,
2. Lending technical help by making company engineers and technicians available to the vendor to help him tide over the initial technical problems.
3. Help in R&D, by again lending technical help to not only to establish the company, but also to help improve its products and services on a continuous basis.
4. Guaranteeing him a certain amount of business (this is particularly needed during initial stages of setting up the vendor).

Such efforts on the parts of the buying company will produce a kind of goodwill and rapport between the two companies. Such a vendor will be willing to listen to the special problems of the buying company and, therefore, will be an asset to the buying company.

Some of the vendor companies may be large and established companies who may not need financial, technical or R&D assistance. But such companies can still be cultivated in many other ways by collaborating with them in various projects of interest to them, jointly investing in a project to produce common raw materials and sub-assemblies required by both the supplying and the buying companies etc,