Vendors – the basics (for the uninitiated)
A “vendor” or a “supplier” is any individual, organization or company that sells goods and services to another individual, organization or company, which in turn uses these good/services for the creation, sale and/or delivery of a product or service offered by the latter. Vendors form a critical part of what is called the “supply chain”: the network of all the individuals, organizations, resources, activities and technology involved in the creation and sale of a product, from the delivery of source materials from the supplier to the manufacturer, through to its eventual delivery to the end user. For instance, manufacturers of airbags are vendors to automobile companies. A company that provides delivery services to an online food ordering startup is a critical vendor for the latter.
Vendors are an important part of the early stage startup ecosystem, as they provide critically needed services to tech startups which find it difficult to build in-house capabilities for these services. Additionally, it is often more economical for early stage startups to obtain such services through a vendor. Therefore, effective vendor management is very crucial to startups in helping them control costs, drive product/service quality and mitigate risks inherent to tech startups. In helping understand the critical aspects of understanding how startups select and manage their vendors, CIIE reached out to India’s leading e-commerce company – Flipkart. We spoke with Mr. Prabhu Balasrinivasan, Sr. Director – Procurement, on the topic. The following are excerpts from our conversation with Prabhu.
Vendors as long-term partners
Flipkart’s vendors are spread across several verticals such as projects and infrastructure, facility management, IT infrastructure (primarily hardware), commercial contracts (for services such as HR), and marketing and communications. One unique aspect of Flipkart’s vendor sourcing process is the importance that is stressed on a vendor’s approach to technology and innovation. Flipkart sees their vendor partnerships as long-term relationships; hence, it is important for vendors to have the same (or similar) approach towards innovation as Flipkart. This also means that the vendors must be open to investing significant resources towards their contracts with Flipkart, keeping in mind the long-term objectives.
To explain further, Prabhu brings up his past experience in the automobile industry, where companies often work with only one OEM vendor for a particular component (such as the engine used in a particular model). While this ensures a consistent level of quality for the finished product, this also means that the growth of the vendor is almost proportional to that of the company. The company does well; the vendor does well also. Bringing this concept to Flipkart, Prabhu takes pride in mentioning that the entire IT infrastructure of the company is provided by a single vendor; a relationship that started 4 years back, with the vendor having grown significantly over this time period. The relationship is such that, at times of troubleshooting, even the top level management at the vendor is often directly involved. With such vendors, Flipkart also often enters into exclusive contracts, but this is not very common.
Other vendor selection criteria
Ofcourse, this stress on innovation is in addition to the standard steps in the procurement process such as finding current market leaders, shortlisting multiple vendors and seeking samples of the required work from each of them (over a fixed time period), followed by rating and then selecting the final vendors with whom service contracts are signed. Criteria used for evaluating and rating vendors also include service quality, delivery time, pricing, and responsiveness. On the topic of pricing, Prabhu is candid in that Flipkart is relatively conservative (although they are not aggressive) with their vendors (considering the relatively narrow margins in the ecommerce industry), preferring to work with vendors that offer suitable pricing on a larger scale. Another important criterion is the vendor’s past experience in dealing with large transactions with other clients.
Flipkart is open to both market leading vendors (i.e., using the magic quadrant method from Gartner), as well as smaller start-ups, but will lean towards vendors that have the long-term vision and innovation approach as above. With regard to market leading vendors, however, Prabhu shares an interesting insight; market leaders were not always willing to invest in the resources required for the long-term relationship that Flipkart is looking to build.
Words of wisdom
Prabhu considers ecommerce as a means of empowerment to the common person, offering him/her the freedom and convenience to choose a product of his/her liking. In a similar manner, startups must offer convenience to vendors working in this industry, ensuring that there is a regular channel of communication open between the two. Vendors on the other hand must strive towards offering a consolidated array of services, and invest in building long-term relationships with their startup clients; the keywords being “consolidated”, “invest” and “long-term”.
“Customers want things that are simple!”, Prabhu says confidently. According to him, aspiring entrepreneurs must strive towards making the customer experience simple and rewarding, which means they must think innovatively, and act aggressively. (We couldn’t agree more.)
Sincere thanks to Mr. Balasrinivasan for sharing his wisdom and experiences with us.