What is Vendor Management?
Vendor management is defined as the process that businesses and organizations use to maintain their suppliers (vendors). The vendor management process includes controlling costs, finding vendors, decreasing vendor-related risks, guaranteeing service delivery, and negotiating contracts.
The vendors a company uses will depend upon the type of business they conduct. They may involve vendors as diverse as broadline suppliers (e.g., US Foods, Sysco), healthcare suppliers (e.g., McKesson, Medline), marketing consultants, social media influencers, produce suppliers, IT vendors, cleaning staff, and stationery suppliers. Vendors can vary in size from individual traders to giant corporations.
Vendor management helps companies take third-party vendor relationships from a passive company transaction to a proactive, collaborative, partnership. While working with IT, vendors can help ease the burden, but this also raises concerns, especially around data, risk, and security. A strong IT vendor management strategy can help companies determine which vendor best fits their needs while keeping in mind relevant features, availability, price, risk and security, and compliance regulations.
Why is Vendor Management Important?
Vendor management is crucial because it plays an important role in choosing vendors to streamline business activities. Collaborating with the appropriate vendor can accomplish strategic goals, including:
- Increase profits
- Reduce expenses
- Maximize employee time
- Improve customer service
- Leverage spend volume
- Expedite the vendor onboarding process
- And much more
Vendors must be managed efficiently to reduce the risks of supply chain disruption. Doing so will assure all services and goods are delivered on time. For example, during the COVID-19 pandemic, many vendors ran out of crucial personal protective equipment (PPE). This meant that customers purchasing these items needed the ability to see if a product was in-stock before placing an order. Allowing our customers to order using vendor direct, we were able to help our customers get the PPE that they needed, without the frustration of getting their order with those critical PPE items missing.
Apart from this, effective vendor management processes can assist companies in taking advantage of existing strong relationships with vendors, leading to better negotiated rates. Procure-to-pay software such as Procurement Partners works collaboratively with our customers, vendors, and GPOs to help companies achieve lower costs by leveraging the purchasing power of their large customer base.
Vendor Management Process
The vendor management process has various stages, including:
- Sourcing Vendors: The vendor sourcing process works by researching and selecting vendors suitable for supplying your organization. Once you identify a list of potential vendors, ask them for quotes via ‘Requests for Quotation’ (RFQs), & ‘Requests for Proposal’ (RFPs). Although price is an essential factor in the selection process, vendors should also be selected based on reputation, capacity, and ability to communicate efficiently.
- Contract Negotiation: Contracts should be finalized before the commencement of the vendor management process, and they should be fine-tuned to benefit both parties. That said, contract negotiations may be time-consuming. The process must specify the start and end of the arrangement, terms and conditions, and the goods and services that the deal contains.
- Vendor Onboarding: Vendor onboarding includes the gathering of information and documentation needed to set up the vendor as an authorized supplier for your business. During this process, you should ensure that the vendor can be paid for any goods and services they provide, which means gathering all their payment information, insurance details, tax forms, and proof of the appropriate licenses they own.
- Tracking Vendor Performance: Throughout this process, companies should evaluate and monitor the performance of each vendor they hire. This could include watching their timekeeping skills, the quality and volume of their goods, and their customer service levels.
- Risk Management: Any new vendors should be reviewed for potential risks that could disturb or impact the company. These risks include data-security issues, compliance violations, loss of intellectual property, and lawsuits. Additionally, companies should create emergency plans if vendors fail to deliver their goods or services as agreed in the contract. Companies generally work with more than one vendor for mission critical products (e.g., food for hospitals) in case of any unforeseen circumstances.
- Payment: Finally, ensure that all vendors are paid on time for their goods and services, as described in the agreed terms of your contract.
By obeying these vendor management process steps, you’ll be able to build long lasting professional relationships with all of your vendors.
Benefits of Vendor Management
An organization can experience several benefits by having proper vendor management in place. These include:
- Better Selection
Implementing an appropriate vendor management process can benefit your organization through a larger selection of approved vendors. This may create a competitive situation that results in additional options, better costs and increased value in the vendor relationships.
- Better Contract Management
In a multi-vendor scenario, the lack of a Vendor Management System (VMS) elevates the issue of managing contracts, documentation, and other important information in your organization. Implementing a proper vendor management system can benefit an organization, giving a centralized view of the current status of all contracts and other helpful information, which will allow your organization to achieve better decision-making abilities and save valuable time.
- Better Performance Management
An integrated view of all the vendors’ performance can be achieved by implementing a vendor management system. This can provide your organization a clear understanding of what is working and what is not (e.g., price differences between suppliers for similar products). This eventually leads to improved efficiency, enhancing the organization’s overall performance.
- Better Vendor Relationship
Managing multiple vendors may be difficult and time consuming. While some vendors may prove easy to manage, others may not, and complexity is particularly added when you work with multiple vendors for similar products.
By gathering all vendor-related information in a single place, you benefit by being able to analyze your purchases more efficiently and thereby adjust your decisions as needed.
- Better Value
A vendor management system’s ultimate goal is to get the most value for your organization. So, when the implementation of a vendor management system is done correctly, it can result in long-term savings and improved earnings.
Challenges in Vendor Management
There are many challenges and issues that an organization may face if vendor management is not implemented properly. They include:
- Vendor Compliance Risk
Before working with vendors, setting standards can save you time and money. Not all vendors may work to your standards. It is crucial that the selected vendor follows your compliance protocol (including the protection of privacy and confidentiality).
- Vendor Reputation Risk
Dealing with multiple vendors is not a simple task. Work quality should be determined upfront before signing a contract via a service level agreement (SLA). While some suppliers may get exceed expectations, others can barely meet service level agreements or even breach such agreements. Therefore, a company would be well served to leverage references prior to any vendor selection. This may help uncover valuable insights that you may have missed in the first place.
- Lack of Visibility
While it is essential to have a centralized data storage solution for managing vendor data, it also helps the organization form a centralized view and improves visibility, leading to more useful resource allocation and enhanced performance.
- Vendor Data Storage
As your organization develops, it becomes essential to have a vendor data storage solution. The absence of a vendor management system would mean storing and retrieving data individually from vendors. Considering that you may be dealing with various vendors simultaneously, this may be extremely time consuming. Additionally, repetitive manual work generally results in higher error rates.
- Vendor Payment Risk
Some vendors adhere to different payment terms, while some may stick to industry-standard terms. Figuring out the terms and assuring that the payment is always made on time is one of the most significant issues, especially while dealing with multiple vendors at the same time.