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How to Perform Supplier Due Diligence

How to Perform Supplier Due Diligence
Sep 09, 2019 Red Flag Alert Updated On: October 11, 2023

It’s crucial that the suppliers you work with are reliable and able to provide you with the service you hired them for.

Whether you’re a restaurant that needs ingredients or a manufacturer that needs raw materials, any issues getting supplies can result in – at the minimum – a major headache as you search for a last-minute replacement, or at worst legal issues as you struggle to fulfil contracts.

One way you can reduce the chance of issues occurring is to carefully choose the companies you work with. In this article, we’ll provide some tips on how to perform due diligence on suppliers.

Step One: Check the Business is Legitimate

The first step is to check the company is a legitimate entity.

If the business is a limited company based in the UK, you can visit the Companies House website to confirm details such as its address and registration. You can also download its latest accounts.

Alternatively, if the company is a VAT registered supplier based in Europe, you can see its VAT numbers on the VIES website.

While it may be harder to verify suppliers outside these areas, there are still things you can do. Asking for references can help, as can searching for the business on Google or speaking to a representative over the phone.While it may be harder to verify suppliers outside these areas, there are still things you can do. Asking for references can help, as can searching for the business on Google or speaking to a representative over the phone.

It’s also important to check the company has all the certifications and accreditations it says it has. Ask the supplier to show you certificates or contact the registering body to check the company’s claims.

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Step Two: Define Your Terms of Business

Defining your terms of business before entering into a contract will ensure both parties know what is expected of them and reduce the chance of conflict later in the process. Make sure you understand how the supplier deals with payments, delivery, returns, or anything else that is important to the success of the deal.

You should also identify potential places where conflict could occur and find out what the supplier would do in these circumstances. What is its policy if the product you need is unavailable, for example, or how will it compensate you if it is unable to complete an order in time?

Step Three: Ask for References

Speaking to a supplier’s existing or past customers can be a good way of getting an idea of how the company operates.

The business is unlikely to pass on the details of a customer that has had a bad experience, so this strategy might not reveal the full story. However, by asking general questions you’ll be able to get a good idea of what it will be like to work with the company.

You can undertake further research by checking social media pages, review websites, or Google Business listings.

Step Four: Research the Company’s Directors

Finding out about a company’s directors is a good way to check for potential problems. You can see changes of directors by checking the company records on the Companies House website. If there are recent changes, you could ask why this is the case and how it will affect things going forward.

Additionally, Googling the name of the director or searching for them on LinkedIn may bring up further information about their past successes or failures. This could influence your decision to work with a particular company.

Anti-Money Laundering regulations make it a requirement for businesses to know who they deal with to prevent money laundering. These regulations put the responsibility on businesses to put the required protection processes in place. This is another reason why it is important to research the directors.

On a related note, you should also check who is funding the business. Businesses in which owners have a fixed charge over them are 2.8 times more likely to fail than those that don’t. This can be devastating for the businesses they deal with as creditors with a fixed charge will receive compensation first, leaving less on the table for others.

Step Five: Request Sample Products

Where appropriate, a good way to get an idea of the service and the product a supplier offers is to request samples.

This will show you the quality you can expect from the finished product, as well as give you a glimpse into how the business works. If the samples arrive late and in unsuitable packaging, it isn’t a good sign going forward – even if the product itself is as expected.

If you are happy with the sample, you could put terms in your contract to ensure the product doesn’t deviate from the supplied sample.

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Step Six: Assess the Proposal

The quality of the proposal a supplier gives you can hint at how valuable you are as a customer.

If the proposal is tailored to your needs and shows how the product can benefit your business, it could be a sign that they need you. While this may not necessarily result in a better product, it could suggest they will have time to work with you to sort out any issues that may arise once you begin to work together.

Step Seven: Check the Company is Financially Healthy

Even when you have assessed whether the supplier is suitable and trustworthy, you should also check if it is financially healthy. This is critical if you plan to rely on a single supplier to power much of your business. Any problems at the supplier could be a huge issue.

As well as the risk of having to stop trading while you search for a new supplier you may also struggle to find a contract at the same price, which can lead to unexpected costs.

Red Flag Alert is a critical tool for checking the financial health of companies. All businesses in the system get a health rating that shows how likely they are to fail in the next 12 months. This helps companies make an informed decision about the amount of risk they are willing to take on.

These ratings consider several factors, including liquidity, business age, and whether it has enough capital to successfully operate in the industry it works in. Checking these ratings before making a decision can help you avoid future problems.

Learn more about how Red Flag Alert helps you protect your business from financial risk and comply with regulations, why not Try Red Flag Alert today 


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