No one in this world can do everything on his own. We need other people to support us for survival. Just like us, organizations need support from other companies to conduct their business. These other companies are known as vendors (also called as sellers, suppliers, and providers).
The main job of the vendors is to provide services or supply goods and materials to the performing organization. The process of taking such services or buying goods from the vendors is called procurement.
Since vendors are crucial for supporting a business, vendor management is an important aspect of procurement. Generally, most big companies have a separate department (supply chain management) for procuring goods and services.
Here, I discuss the best practices and benefits of vendor management in procurement.
What Is Procurement?
Procurement is an overall process of purchasing or acquiring products, services, goods, or materials from a different legal entity.
Many companies use the terms procurement, purchasing, and sourcing interchangeably, but these terms have different connotations.
Sourcing and purchasing are part of the overall process of procurement. They specifically refer to ordering and buying goods or services.
Procurement is much broader than sourcing and purchasing as it refers to the entire process. It includes planning, sourcing, acquisition, and payments.
- Planning includes many things like determining what needs to be procured, quantity and quality of procurement, timelines for procurement, defining roles and responsibilities of different stakeholders, and setting & approving budgets. It needs close coordination between different departments of an organization. You can read our detailed article on procurement management plans to understand more about procurement planning.
- Sourcing includes searching for potential vendors, analyzing their strengths and weaknesses, shortlisting vendors, establishing relationships, and signing vendor contracts. The shortlisting of vendors is usually done via competitive bidding. It is followed by awarding a contract to the selected vendor. Negotiations are done prior to awarding the contract to find the most favorable terms.
- The acquisition includes ordering of items, taking deliveries, reconciliation, inspection, and acceptance of goods or services from the contracted vendors.
- Payment is the final step in procurement, which includes settling the vendor invoices and them paying for the procured items.
What Is Vendor Management?
Vendors are individuals or companies who provide goods and/or services to the performing organization. Vendor management is one of the most crucial aspects of the overall procurement process. Vendor management should not be confused with supply chain management as it deals with people rather than goods and materials.
At any given point of time, a large organization may be working with hundreds, if not thousands of vendors, who could be represented by tens of representatives. In addition, each vendor will have varying contract terms.
Managing so many vendors can become quite cumbersome. If the vendors are not handled properly in a structured manner, your organization could end up paying too much or get into litigation with the vendors.
Vendor management includes searching for the vendors, researching their backgrounds, shortlisting vendors, negotiating terms, signing contracts, making payments, resolving claims, and managing vendor relationships. It also includes defining KPIs & SLAs, evaluating vendor performance & monitoring their financial health, and contract management.
Why Should You Focus On Vendor Management?
The success of your organization depends on the success of its suppliers. They not only help you in delivering goods and services to your clients but also are instrumental in driving profitability and growth. Over a period of time, a supplier could become your strategic vendor who is central to your organizational activities and functions.
In the past, procurement used to be a solitary department that bought goods and/or services but things have changed in the last few years. Procurement function is now a fundamental aspect of overall business strategy. Organizations, all over the world, are adopting a strategic approach to manage their suppliers in order to get the most value.
The Vendor Management Process
In simple terms, the vendor management process is the set of steps to shortlist, onboard, engage, and handle the vendors. It involves the following steps.
1. Search vendors
The vendor search can be done using business directories, newspaper advertisements, B2B (business to business) websites, references, and organizational lists. You can form a vendor selection criterion while searching for them. For example, you can specify that the vendor should have a minimum turnover of $100m in the last three years, they must have some industry certifications, etc.
2. Invite bids and shortlist the vendors
Once you have shortlisted the vendors, you can send them RFPs so that they can submit their bids (technical proposals and quotations). You can shortlist the vendors after examining and comparing their bids.
You can form an evaluation criteria and design scorecards to rank the vendor bids. Your goal should be to find the right partners with whom you can forge long-term vendor relationships.
Finding good vendors is important to avoid disruptions. As per Deloitte, "87 percent of respondents admitted they had faced a disruptive incident with third parties in the last two to three years".
3. Negotiate and sign the contract
After analyzing the bids, you can shortlist the vendors and negotiate with them. The contract negotiation can be done on price as well as terms and conditions.
Negotiating helps both the parties so you should push the vendors too hard. Be open to the vendors so that they too can negotiate with you for favorable terms.
A negotiation breaks the ice and creates a foundation for building a strong rapport. A win-win negotiation goes a long way in building long lasting supplier relationships.
After the negotiations, you can sign a contract with the vendors that are mutually beneficial.
4. Onboard vendors
After signing the contract with vendors, you should onboard them. Vendor onboarding helps in integrating them into your organization's network. A smooth onboarding process helps in vendor relationship management.
Vendors may not be able to contribute efficiently if they are new vendors and are not aware of your organizational systems. This is where your expertise will be needed to train and educate the vendors about your organization.
5. Establish goals
You should set clear goals for your vendors to help them support you in your business. The best thing is to share clear and objective performance metrics, KPIs, and SLAs that are achievable and realistic.
You should communicate your expectation to the vendors so that there is a mutual understanding between you and the vendors.
6. Monitor vendor performance
Establishing goals is not enough. You need to constantly communicate your expectations to the vendors and ask them to follow the terms written in the contract. You should monitor their performance regularly and ensure that they are performing at their best.
While monitoring, you should also give them regular feedback and provide them with the necessary support so that they are able to deliver the results.
7. Reward vendors
This is an optional step, but it goes a long way in building long-term relationships. If you reward the vendors for their contributions, they see themselves as a part of your organization and go an extra step to meet the goals.
8. Regular communication
Regular communication with vendors is important to set the right expectations (#5 above), monitor vendor's performance (#6 above), and build relationships (#9 below).
By communicating regularly, you can avoid unpleasant situations and manage vendor risks early. You should establish formal and informal communication mechanisms to ensure open communication.
9. Build relationships
It is difficult to find good vendors, so you should nurture your relationships with them after the contract is signed. There is no point in losing good suppliers because of a poor relationship with them. You should take a strategic approach to build and maintain relationships.
You can do all of the following to build successful relationships with your vendors:
- Share information and priorities: You should share the necessary information with your vendors in a timely manner and tell them about your priorities. This will enable them to work efficiently and direct them toward meeting your goals. You can share information related to implementation and launch dates, plans to go to market, and any other relevant information that might help them to do their job.
- Involve them in developing strategy and allow them to innovate: You can get the best results when you and your suppliers work together to develop a common strategy for achieving the business goals. You can invite them to strategy meetings and give them space to innovate. You need to remember why you hired them in the first place – they are experts in their field. They can provide invaluable insights and give innovative suggestions, which can make your product better. They can become instrumental in giving you a competitive advantage.
- Aim for the future: The real value of a business relationship comes from building long-term partnerships. Don't look for short-term relationships, which will only give you short-term gains and marginal benefits.
- Collaborate for win-win agreements: Even though you are paying your vendors, you should treat them as equals. They are with you because of their expertise. So, you should not push them too hard while negotiating with them. This will only create resentment, which can lead to problems in the future. You should build trust and focus on negotiating agreements in good faith. This will give a sense of satisfaction to both parties.
Here is an interesting talk that can give you more insight about building relationships (you'll need to be a member to access this content).
Benefits Of Vendor Management
Streamlined and structured vendor management helps businesses on many fronts. Following are some of the main advantages of good vendor management.
1. Mitigation of risks
Despite the risk of disruption, the practice of measuring and managing third-party risks is presently in its infancy. Recent research found that 82% were not confident or unsure if they have identified all the third-party risks their organization is exposed to.
Proactive supplier management increases visibility and reduces supplier risks. It allows you to continuously track the vendors, which helps in managing future unforeseen events.
To protect your organization from potential risks, you can conduct a risk assessment and set up processes for information sharing and monitor their performance periodically. You can use the data from your performance system to identify potential pitfalls and suggest improvements before they become serious problems.
2. Performance optimization
Monitoring the performance of the vendors not only reduces vendor risk but also improves the results. You can set up and streamline processes to monitor, evaluate, and measure the performance of your vendors to ensure that they are in line with your requirements and expectations. This will instigate them to improve and optimize their performance.
3. Costs reduction
Regular communication and periodic monitoring improve visibility, which can help you to determine hidden costs in the procurement process. This way, you can cut the wastages and control costs.
In addition, if you have a long-standing relationship with the suppliers, you can negotiate better rates and contract terms, which can lead to cost savings. This, in turn, can increase your profit margins.
4. Long term relationships
Finding good vendors is not easy. It takes time and effort. By nurturing good vendors and establishing strong relationships, you can improve procurement efficiency.
Related Listen: How To Build Long-Term Loyalty With Virtual Contractors
5. Improvement in the efficiency of administrative work
The efficiencies of administrative work can be significantly improved by having a structured vendor management program. The administrative work can include invoice processing, recordkeeping, payments, claims management, reporting, and performance management.
6. Brand protection
The value of your organization's brand can become besmirched if you do not have suitable vendors. Unscrupulous actions by unprofessional and unethical vendors can damage your reputation. However, a sound vendor management program can prevent this by only enrolling good suppliers.
Common Challenges In Vendor Management
Dealing with third-party vendors is not without troubles or challenges. While managing vendors, you might encounter problems related to compliance, maintaining your brand value & reputation, avoiding disputes, and managing claims & counter-claims throughout the life cycle.
The challenges of vendor management tend to grow along with the size of your organization and the number of contracted suppliers.
You should develop and fine-tune your supplier management process to take care of the following challenges:
- Managing an ecosystem of vendors. Your organization could be dealing with hundreds of disparate vendors. Your systems and processes should be able to manage all these vendors efficiently. The systems should be able to handle issues related to invoicing processing, payments, claims management, quality control, and compliance.
- As the number of vendors increase, so do the number of contracts. Each contract comes with its own unique challenges. Contracting requires close coordination between many different departments like legal, procurement, marketing team, and production. Furthermore, there are different types of contracts prevalent in different industries.
- Management of risks is always a complex affair. No matter how sophisticated and streamlined your vendor management processes might be, uncertainty always exists. Risk identification, analysis, prioritization, and response planning is an important aspect of the risk management process related to suppliers.
- Hiring the right people, implementing structured processes, and building proactive vendor management systems increases the administrative costs. It is a challenge to keep these costs in check.
- When you have a number of personnel involved in procurement activities, there is always a chance of vendor data breach. Nowadays, businesses are highly dependent on data and any kind of data leak can lead to reputation and financial loss. Additionally, as businesses automate their processes and move them online, cyberattacks become a top concern of the organization.
What’s Next?
No company, weather big or small, can escape without working with vendors. Every company needs something that can be supplied only by a third party.
Over the last few years, managing vendors has become a crucial aspect running a business. You need to regularly communicate, interact, and support your vendors in order to build long term relationships and get the most value out of them.
Managing vendors is not without its challenges but benefits of effective vendor management outweigh the challenges.
How do you manage your vendors in your organization? What is your vendor management strategy? Do you have standard processes for vendor management? What are your vendor management best practices?
Please leave a comment below and also share this article with your colleagues.
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