The procurement process, in general, involves two to three different parties. They are the client company, a distributor and a vendor or supplier. However, in most cases, a client company will directly procure their goods and services from a vendor. In either situation, the role of vendor relationship management is critical to the entire process of procurement.
What Does Vendor Relationship Management Mean?
Vendor Relationship Management or VRM refers to the process of improving the relationship between a company and their supplier. This improvement will result in increased trust between the vendor and the supplier while also working towards a common goal that benefits both parties.
VRM is one of the priorities that are at the forefront of every procurement team’s mind. This is because the key benefits of developing VRM is that it will result in improved TCO or Total Cost of Ownership and better flow of data between a vendor and a client company.
Best Practices That Contribute to Vendor Relationship Management
To ensure that the VRM strategy that a company uses is as effective as possible, it will be advisable to follow certain practices. These safe practices include:
- Communicating Expectations
To ensure that the vendor is on the same page, a company must communicate what quality of goods or services they are expecting. By doing so, a vendor has a better idea of what to deliver to their clients. In addition to this, this communication will also be a way for a vendor to contribute to the business’s goals.
Doing so one will receive goods of a particular standard. Collaborating with vendors will also help to evaluate the quality of goods and performance of the vendor.
- Proper Contract Creation
The contract that is drawn up between the company and the vendor should also state all the important terms and conditions of the deal. This will include certain aspects like stating deadlines and the acceptable quality that the vendor will have to provide after agreeing to the contract.
A company will have to create realistic deadlines within which the vendor will be able to deliver the quality of goods the company desires.
- Implement KPIs
Key Performance Indicators are an important tool that teams use to measure different aspects of the existing procurement system. Of the many KPIs in existence, there are around eight KPIs that will measure the performance of the vendor.
Some examples include lead times, contract compliance and more. Therefore, the procurement team will utilize these indicators to determine where the vendor could improve and lend a hand while carrying out these improvements.
Among these KPIs, one should keep track of the Relationship Management KPI. This is because these indicators take into account the vendor’s commitment, flexibility and innovation they used to deliver their goods.
- Evaluate Vendor Risks
The vendor and client company relationship can come with many risks. These include financial payment risks, operational risks, contract non-compliance and more. Therefore, the team has to take special care to plan measures that will mitigate these risks. At present, the risks that are present are always changing. Therefore, the procurement team will have to constantly be on the watch to formulate new strategies to overcome the risks.
Distinguishing Between Vendor Relationship Management and Vendor Management
In the eyes of the common individual, there does not seem to be a very drastic difference between a vendor relationship and vendor relationship management. However, there is a significant distinguishing feature between the two.
In short, Vendor Management refers to the series of activities that will work to improve the different capabilities of the vendor. In a way, the client company will look to develop a vendor as a whole to ensure that the quality of the goods coming in meets the standards they desire.
When it comes to Vendor Relationship Management, the procurement team takes special care to create a better relationship with the individuals involved on the vendor’s side. Therefore, it is a subset of vendor management.
Improving Vendor Relationship Management Through Technology
With the implementation of technology in the procurement process, several aspects of the process have seen improvement. One of these aspects is Vendor Relationship Management. When a team utilizes procurement software, it will benefit VRM in the following manner:
- Better Collaboration
In general, digitizing the management of the procurement cycle will mean that a procurement team will be able to communicate better with the vendors. This streamlined channel of communication will help to reduce any chances of miscommunication between the vendor and the client company.
In addition to this, if the vendor is delayed in their delivery or faces other problems, the client company will be able to communicate with them in real-time. Therefore, procurement software will help to improve the collaboration between the two parties.
- Single Platform
The software is also able to house all important information on a single platform. This will mean that a company can interact with several vendors using one software. In addition to this, managing the accounts and contracts becomes much easier when it is carried out through digital pathways.
- Easy Vendor Onboarding
Vendor onboarding can sometimes be a tedious process that entails a significant amount of paperwork. Companies may even struggle to find appropriate vendors to deliver the goods and services they desire. Procurement software eliminates the difficulty of finding vendors by compiling lists of potential vendors.
Therefore, a team can pick and choose the vendor that they find most suitable to the needs of the company. The team will also be able to create a more comprehensive perception of vendors’ abilities by going through the digital catalogs that the vendors create. In addition to this, it will also contribute a great deal to the later stages of vendor onboarding as well.
- Quick Payments
One of the more beneficial aspects of using procurement software is that the process of making payments to the vendors is made easier. This is because the generation of invoices and POs takes place on the software and is digitized. Therefore, no longer will a company have to manually process the invoices.
This will make it possible for a company to make payments more quickly and obtain the incentives that accompany quick payments. In addition to this, the fact that the software can create digital payments will also mean that a company can carry out audits more quickly in the future.
- Contract Compliance
Finally, the software will also be handy in ensuring that the vendor complies with all the terms and conditions of the contract. This is because the procurement software will keep track of all the KPIs in relation to the vendor and the relationship they have with the company.
Therefore, requirements like the quality of goods, delivery time and other performance indicators will be tracked and recorded for a company to refer to at a later stage. For the vendors that are unable to meet the standards, the company will be able to initiate corrective action plans or SCAR and subsequently maintain the quality of the goods.
Vendor Relationship Management involves a variety of aspects and activities that both parties need to keep track of. Therefore, a company can utilize procurement software in addition to other practices to ensure that the relationship between the vendor and themselves does not experience any difficulties.