Strategic vendor management process is a crucial part of all successful businesses. By executing a well-managed vendor management program, businesses gain more control for vendor sourcing and researching, turnaround times, performance evolution, contracts management, obtaining quotes, and more.
However, given the complexity of the process, developing an effective vendor management system requires a deep understanding of the various vendor management tools, and processes, as well as, require significant resources and skills. While most businesses think of vendor management as simply the process of sourcing the right vendor or offering the most affordable pricing for products or services, in reality, the process is much more intensive and complex involving various other aspects to consider.
Now, vendor management software comes as a great utility, enabling businesses to implement an effective vendor management strategy by streamlining all important processes, and achieving mutual benefits for all parties involved.
Here in this post, we will be giving a comprehensive introduction to vendor management. We will also be looking at the challenges that businesses may face while implementing vendor management solutions, as well as, the benefit of VMS. Lastly, we will also be looking at some best practices and tips for achieving success with regard to vendor management solutions.
So, let’s get started…
What is Vendor Management System and Why is it Important?
Going by the simplest definition, vendor management refers to the process used by businesses to manage their vendors (suppliers). The process of vendor management including various sub-tasks including; cost controls, identification of vendors, negotiating contracts, lowering supplier-related risks, and guaranteeing service delivery.
The number of vendors used by a business will ultimately depend upon the operations and nature of the business. For instance, a large enterprise may need diverse suppliers including; marketing consultants, IT vendors, social media influencers, stationery suppliers, cleaning staff, and others. Also, the vendors used by the business may vary from individual/sole traders to giant corporations offering multiple services.
Since business continuity and growth plans depend directly on the suppliers and vendors employed by the company, vendor management plays an important role in business success. Firstly, vendor management helps businesses to identify the right suppliers that are able to complement business processes and streamline their core operations. With the right vendors, businesses are in a better position to improve their efficiency, increase profits, enhance customer satisfaction and improve business ROIs. Vendor management also enables companies to achieve strategic goals of streamlining the vendor onboarding process, as well as, lower production costs.
Vendor management also enables businesses to improve controls and management of vendors by improving the supply chain system and minimizing the chances of operational disruptions. This also assists businesses to ensure timely delivery of goods and services, subsequently resulting in increased customer satisfaction rates. Lastly, the vendor management process also helps businesses to create strong and reliable relationships with vendors; resulting in better-negotiated rates.
Vendor Management Process
The vendor management process comprises of various stages including;
- Sourcing vendors:
The vendor sourcing process involves screening and identification of apt vendors that can complement business processes by supplying the required goods/services to the organization. The process should include shortlisting multiple vendors and asking for quotes through “request for proposals (RFPs) or request for quotation (RFQs)”. While comparing the pricing from different vendors is an important factor, it’s not the most important. In fact, the final selection should be based on the reputation, capacity, recommendation, and communication efficiency of the vendor – pricing could just be icing on the top.
- Contract Negotiation:
Contract negotiation is another important stage of the vendor management process, which should be completed at the early stages of the process. The vendor contracts should be fine-tuned to offer mutual benefits to both parties. Since the negotiation process can be lengthy, it’s better to be conducted at the early stages of the process with clearly defined terms. Some of the important components of a vendor contract should include; start and end dates for the arrangement, goods/services included in the deal, pricing, and terms & conditions binding both parties.
- Vendor Onboarding:
Once the process of contract negotiation is completed, the next step includes the vendor onboarding process that involves gathering important information and documentation for approval of the vendor as a trusted supplier of the organization. One important aspect to consider at this stage is to collect all possible payment information of the vendor including the tax forms, insurance details, and others that will be required to pay them for the goods and services they provide.
Vendor Performance tracking:
Once the vendor is on board with the company, it’s important to keep track of its performance against well-defined parameters. Some of the crucial parameters against which vendors’ performance should be tracked include; timekeeping skills, quality of the services/goods supplied, the volume of the supplies, customer service levels, and others.
- Risk Management:
Apart from performance tracking, vendors should also be checked for potential risks, which may hinder or disrupts business operations. Some of the critical risk management factors to check include; data security concerns, compliance breaches, intellectual property, and lawsuits.
Lastly, businesses need to ensure that vendors are being paid for their goods and services timely as per the agreed terms of the vendor contract.
By following this step-wise approach, businesses can ensure to not only implement an effective vendor management system but also create healthy and long-lasting relationships with reliable suppliers, thus improving their business continuity plans.
Benefits of Vendor Management
Now that we know the various steps involved in designing and implementing an effective vendor management policy, let’s move on to see some of the benefits businesses can achieve after successfully going through this painstaking process;
With robust and effective vendor management policy and procedures in place, businesses are in a better position to identify and onboard reliable vendors, which complements the business operations for increased profits and lowers the operations costs. Also, by implementing a vendor management process, businesses can ask for multiple quotations and negotiate the best price for the organization.
Better Contract Management
Vendor management makes it easier for businesses to handle and manage multiple vendors, which otherwise can be challenging without a robust VMS in place. By implementing an effective vendor management system, businesses get to leverage a centralized management system from where they can oversee the entire performance, and status of vendor contracts, saving them time and resources to manage multiple vendors.
Improved Performance Management
With a robust vendor management system in place, businesses get to oversee and manage the performance of vendors through a centralized integrated system. This not only helps to achieve business bottom lines, but also enables businesses to identify potential failures or part of vendors and take appropriate measures to improve efficiency and performance of vendors by sending notices, and alerts.
Improved Vendor Relationships
A reliable and consistent relationship with vendors is crucial to achieving organizational bottom lines. With a robust vendor management system, businesses are able to gather all important vendor-related information, which subsequently can be used to build strong and mutually trusted relations with vendors.
The end goal for any vendor management system is to assist businesses to squeeze more value from their investment. Thus, by implementing an effective VMS, businesses get to benefit from increase profits and long-term savings.
Challenges of Vendor Management
While there are various benefits of implementing an effective vendor management strategy, the process is inherently complicated and includes various challenges that are required to be dealt with by businesses. Some of the challenges include;
Vendor Compliance Risk
While a vendor management system may help you to identify and onboard the right vendors for your business, there’s always an inherent compliance risk. That’s because not all vendors that passed through the VMS will be able to deliver as per the set standards and expectations. Thereby, businesses need to have definite compliance criteria while dealing with vendors, which may help to save unnecessary hassle, time, and money.
Vendor Reputation Risk
Sourcing and managing multiple vendors is a tricky task and it becomes even more complex since there is no way businesses can assess the quality of work offered by vendors until the contract begins officially. And while most vendors may be able to keep up with their designated performance standards effectively, there will always be some that will fall behind the expectations, which ultimately will impact the business performance. Thereby, it is important to perform background checks to be sure of the performance levels of potential suppliers.
Lastly, making payments to vendors can be tricky. Again the problem gets even more complex when you have to deal with multiple vendors, and keep up with different terms of payments and schedules. With an effective and robust vendor management system in place, businesses are in a better position to automate the payments for multiple vendors, as per the agreed terms and conditions. Also, by automating the payment procedure, businesses get to reduce the chances of errors and create better relations with vendors.
Vendor Management Tips for Success
Well, now that we have gone through the benefits and challenges of the vendor management system, here are some tips that can help you successfully implement vendor management system;
Clearly Communicate Priorities and Information
Perhaps one of the most important aspects of a successful vendor management program is to clearly define the priorities and information with vendors. Now, we aren’t saying to share any confidential information, rather the information may include what you are expecting of them, and what services/goods you will need on priority. This will ensure that both parties stay on the same page and that vendors are able to meet your business requirements.
Discuss Business Strategy
While this isn’t compulsory practice, however, if your business does have reliable vendors supplying key services or products for business operations, you can invite them to strategic business meetings discussing those products. Since your vendor is a key component in keeping your business operations running, they have the resources, and expertise to give suggestions and by calling them to a business meeting, you may tap into their potential expertise to improve business ROIs.
Make Long-Term Partnerships
When talking about vendor management, long-term and mutually respected partnerships always trump over cost savings or achieving short-term gains. This is a golden rule of vendor management. As discussed above, identifying and onboarding reliable vendors is a complex and time-consuming process. Plus shifting vendors constantly only negatively influence your products or services. Thereby, if you have identified and taken onboard vendors that are delivering the right services, make sure you convert it into a long-term relationship by offering them preferential treatment and additional benefits to increase trust levels.
What is the meaning of vendor management?
Vendor management refers to the process that enables businesses to effectively manage vendors’ services including controlling costs, mitigating potential risks, and gaining maximum value from vendors for the entire contract lifecycle.
What is the vendor payment?
Vendor payments are also known as accounts payable. It refers to the process of paying vendors for their services and/or goods they provided to the business.