As a type of risk management, vendor vetting allows businesses to avoid external supply chain threats. By selecting suppliers that are compliant with standards and regulations, companies can establish partnerships that promote operational efficiency. Finding ideal vendors depends on a company's individual values and requirements.
What is Vendor Risk Management?
Vendor risk management (VRM) is the practice of assessing potential vendors before and during a partnership. VRM investigates suppliers to determine the risks they possess and their qualifications to handle the company's assets. This evaluation assures companies that they can share sensitive information and entrust the supply chain processes to secure third parties.
Organizations are directly affected by the disruptions their suppliers experience, such as data breaches and operation setbacks. This leaves both companies to bear the financial consequences. Therefore, businesses should invest time in developing thorough VRM to prevent exposure to external threats.
Successful VRM can help companies-
- Mitigate Risks
- Maintain Financial Stability
- Uphold Positive Reputation
- Build Partnerships
- Establish Secure Communication Lines
- Increase Operational Efficiency
- Provide High-Quality Products
- Remain Compliant
VRM also creates a standardized process that allows management to efficiently sift through vendors to find the best fit.
4 Steps to Successful Vendor Vetting
Companies should perform vendor vetting to ensure that potential suppliers can provide high-quality services and products with low risk. Without proper vetting, businesses can experience sub-standard production, leading to unsatisfied customers, decreased retention, and negative reviews.
Organizations can follow 4 simple steps to successfully vet suppliers-
1. Create a Vendor Selection Criteria
First, companies must outline their goals and ideal characteristics. Management should keep in mind that suppliers have their own strengths and weaknesses, so criteria should focus on essential categories. For example, if a business is looking to expedite production time, they might consider a supplier with limited communication but fast operations. Likewise, companies should note any deal-breakers, such as a history of late shipments or bad reviews.
Establishing a criterion to judge suppliers is a form of risk management that reduces the company's exposure to threats. Once vendors have been chosen, management should group them for comparison. However, suppliers should be categorized with similar vendors. For example, suppliers that offer raw materials should be kept separate from those that provide assembled components.
2. Search Sources for Suppliers
Once the vendor shortlist is formed, management should search for reliable sources for additional candidates. Vendors found in publications are already slightly vetted, streamlining the selection process. Companies can find suppliers in several sources, including-
- Trade Publications are catered to specific industries and professions, listing relevant, reliable suppliers.
- Trade Associations are groups established for various fields and may recommend vendors upon request.
- Professional Recommendations come from peers, partners, friends, and work associates who have experience with a vendor.
- Phone Directories are an excellent source to find local vendors.
- Trade Shows allow the company and supplier representatives to talk in person and discuss potential business. However, management should be sure to research vendors ahead of time.
- Local Businesses and organizations can connect companies to vendors that they know.
- Software virtually connects companies to pre-vetted suppliers. The tools also allow users to set filters that display only vendors that have the ideal characteristics.
While the above sources are great places to find suppliers, companies should conduct further vetting on selected vendors.
3. Establish the 10 Cs
Many organizations use Carter's 10 C's of supplier evaluation for the final vetting phase. This system requires interviews from each vendor so companies can rank them on a 1-5 scale. Suppliers will be judged on 10 categories-
- Competency - Are the vendor's current and previous customers satisfied with their service?
- Capacity - Does the supplier have the capability to process large orders in addition to their other clients?
- Commitment - Can the vendor commit to being a trustworthy partner and guarantee high-quality products?
- Control - Does their supply chain management indicate reliability and adaptability?
- Cash - Are they financially stable? Do they have adequate cash flow, liquidity, and credit?
- Cost - How do the supplier's prices compare to other vendors?
- Consistency - Do their processes guarantee consistent, high-quality goods?
- Culture - Do the vendor's values match the company's?
- Clean - Are their operations environmentally friendly and compliant with regulations?
4. Get Quotes from the Final List
- Communication - Have they established lines of communication to promote transparency?
Once management has sorted through all potential suppliers and narrowed down the final list, it is time to gather quotes. Companies should first send over a list of requirements, such as order quantities, time frames, and quality. The returned quotes should be concrete prices, not estimates, and span longer than a month. Management should inquire about discounts and other incentives for extended contracts and larger order sizes.
Quotes are then compared based on price, quality, and order specifications. Companies should aim to find a quote with the best value, not the lowest price.
Vetting vendors is crucial to finding suppliers that offer the best services, products, and value for a business. With proper VRM, companies can minimize third-party risks and build a partnership with reliable vendors.