How to Work With a Manufacturer or Supplier

Structure supplier relationships with clear terms, payment schedules, and performance metrics to protect cash flow and operations.

1. Negotiate payment terms that match your cash cycle. Push for Net 30 or Net 45 terms if your customers pay you on similar schedules. Calculate your cash conversion cycle: days of inventory + days of receivables - days of payables. If suppliers demand COD but customers pay Net 30, you're financing 30+ days of working capital.
2. Set quality specs with measurable reject rates. Define acceptable defect rates (typically 1-3% for most manufactured goods) and who pays return shipping for rejects. Establish inspection windows - usually 5-10 business days after delivery. Document everything: dimensions, materials, performance standards that can be tested.
3. Lock in delivery schedules with penalty clauses. Specify lead times in writing and build in late delivery penalties (1-3% of order value per week is common). Include your right to source elsewhere if they miss delivery by more than 7-14 days. Always ask for delivery windows, not single dates.
4. Secure backup suppliers before you need them. Identify 2-3 alternative suppliers and get quotes annually, even if you don't switch. Keep 15-25% of volume with a secondary supplier to maintain the relationship. Single-source dependencies kill businesses when suppliers fail or raise prices 30%+.
5. Structure pricing with volume tiers and caps. Negotiate price breaks at realistic volume thresholds based on your growth projections. Include annual price increase caps (3-5% is reasonable) tied to inflation indexes. Get 30-60 day notice requirements for any price changes.
6. Monitor supplier financial health quarterly. Request current financial statements from critical suppliers annually. Watch for late deliveries, quality drops, or payment terms changes - often early warning signs of cash problems. Diversify immediately if a key supplier shows debt-to-equity above 3:1.