Most business owners and entrepreneurs are unaware of the business valuation process, what it entails, and how to go about it. The business valuation process is complex, regardless of the selected valuation approach. It helps one understand the company’s value-generating elements, measure their performance, know the business’ competitive position within its market, and clarify future financial expectations.
The choice of a valuation method depends on multiple factors, such as the company’s operational sector, company size, products and services offered, and expected cash flow. Since business valuation aims to identify and assess value-generating areas, it is important to know all those aspects of specific interest or value to a prospective buyer. Business valuation is thus necessary to identify the company’s key profit drivers and facilitate deal negotiations.
After Business Valuation
The business valuation process establishes the company’s current market value. It helps identify gaps between its current value and the value necessary to fulfill the business owner’s exit goals.
A problem arises when owners deny the gap and make no effort to bridge it. However, since business valuation uncovers the areas responsible for the value gap, business owners get clarity regarding what needs improvement. This understanding helps to create their business value creation strategy. One such area of business growth strategy is the role and impact of a company’s suppliers, how they are positioned, and how its sourcing and procurement department manages them.
Why Create Value for Your Suppliers?
Suppliers create value in three ways for business owners:
- Cost savings on raw materials, etc.
- Mitigating potential increase in the cost of raw materials
- Containing the price fluctuations.
The above strategies focus on cost reduction and containment, but this is not ideal for generating value. Business owners can substantially improve revenue by collaborating with suppliers to access innovative technologies, better quality, and enhanced service offerings. Suppliers also have the essential market knowledge to assist buying companies in responding better to customer demands and consumer trends.
Since companies focus more on harnessing their core competencies, they outsource other essential business activities like manufacturing, design, and logistics. When such activities are outsourced to business suppliers, it is imperative to cultivate strong supplier partnerships, as these activities are of great strategic importance to the business.
Reasons for cultivating such partnerships include:
- Businesses need higher operational efficiency due to increasing global competition.
- Customer demand patterns have evolved over the years; customers are demanding flexible and shorter delivery periods and competitive pricing.
- Businesses are more focused on the quality of their services and products.
To fulfill the above conditions, businesses create supplier networks where each supplier is a specialist in its core business activities. On the other hand, suppliers generate value for the company through supplier-customer relationships.
How to Create Value for Your Suppliers
Supplier relationship management aims to maximize the value of a business’ suppliers by providing a holistic set of management tools intended to enhance interaction between the company and its suppliers.
A positive customer-supplier relationship results from the supplier’s initiative to exhibit sensitivity to their customers’ needs. In the current economic scenario, businesses have become more and more demanding as customers due to shorter product life cycles and highly competitive pricing. This desire to continuously cut costs while focusing on core competencies has resulted in businesses outsourcing their entire production. A business’ reliance on outsourcing and procurement of goods and services makes building and managing a large supplier base and focusing on supplier relationship management essential.
On the other hand, higher profits motivate suppliers to perform their best. Therefore, they focus on customer loyalty and satisfaction, translating into direct profit for them. It is a win-win relationship for the business and its suppliers if there is total customer satisfaction.
To be a valued customer to suppliers, business owners can do the following:
Ensure timely payments. Before entering a contract with the supplier, the customer (business) should negotiate favorable payment terms. They should also ensure that they honor their commitment after placing an order. A delay in payment may delay obtaining future orders and challenge the supplier’s goodwill.
Provide flexibility. Unless there is a compelling reason like a competitor’s market entry, the customer should allow suppliers as much flexibility as possible. Avoid unrealistic delivery timelines and interfere in production schedules, leading to poor quality of goods.
Personalize your relationship. Stay in contact with suppliers, and perhaps try to regularly visit the supplier’s facility. This personal contact builds trust, but it also enables the business owner to use these visits to share their observations about the supplier’s operational processes and suggestions. Mutual sharing of knowledge, growth opportunities, service, product benefits, etc., may help them grow further in their respective businesses.
Share critical information. Always keep the supplier in the loop. Do not withhold any critical information that might affect suppliers. Instead, business owners should communicate their visions, long-range strategies, and other important company happenings with the suppliers. Clear, open, and frequent communication clarifies expectations. Cultivating such a relationship with the supplier is necessary, especially if the business owner is planning ownership transfer through a merger or acquisition.
Become a Valued Customer
Being a demanding customer is not wrong, provided business owners have clearly stated their demands and expectations. On the other hand, as valued customers, they must also keep their word and financial commitments. Sharing publicity opportunities, knowledge of processes, product and service benefits, training opportunities, and software upgrades also help build their relationships.
A free flow of feedback and ideas between both parties helps cultivate a mutually beneficial relationship. Ultimately, a streamlined supply chain will positively impact customer service and the costs incurred.
How Value Scout Can Help
When working with suppliers, it is essential to tailor the supply chain to meet a business’ particular needs. This helps consolidate processes, reduce costs, and improve the end product.
A key element of business value creation is determining the value a company creates for its customers. Suppliers play an indirect but essential role in creating this value for a company’s customers, so undermining their role in value creation strategy is a recipe for disaster.
Connect with our team to understand how to turn your growth goals into smaller tasks and assign target values to each such growth initiative.
We would love to assist you in your value creation journey! Use our Value Recon Algorithm™ (within our planning toolset), assign a target value to each task, and better understand how value is created. This helps align your business vision and growth goals with smaller tasks that ultimately contribute to your long-term value creation goals.
To begin using Value Scout’s planning toolset, get a demo here.