Vendor Management- In-Depth Look Into the Process & Benefits

As a business grows and caters to more customers, it will naturally manage a growing list of vendors. Vendors, or suppliers, are external organizations or individuals that provide products and services to the company.

Generally speaking, the larger the business, the larger its network of third-party vendors will be. For example, fast-moving consumer goods company Proctor and Gamble shares that it has more than 75,000 suppliers and agencies, Walmart has over 100,000 suppliers, while Total has an even larger vendor network that counts 150,000 suppliers.

Regardless of size, any business will, at some point, have to take part in vendor management. This is often one of the first steps of the supply chain management process and can greatly affect consumer satisfaction through the quality of products and the speed of order fulfillment.

What Is Vendor Management?

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Vendor management is a catchall term that refers to a wide range of formal and informal business activities. In large companies, this may involve a quarterly meeting dedicated to reviewing vendor contracts. For smaller businesses, this can be a phone call to a supplier to request a quote for raw materials.

Other activities typically involved in vendor management include-

  • Researching vendors and their capabilities
  • Negotiating contracts and contract terms
  • Managing vendor relationships
  • Evaluating the quality of work and performance
  • Evaluating product quality
  • Assessing turnaround times
  • Managing payments and refunds
  • Dispute management and resolution
As supply chains become more complex, businesses are also spending more time on vendor management. Research by TechRepublic shows that 47% of IT professionals work for companies with more than 10 vendor relationships. Another 57% said that their tech departments now spend more time on vendor management than they did the past two years.

Benefits of Vendor Management

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Suppliers play a critical role in a company's ability to satisfy customer demand and achieve optimal business performance. So, it's in any business's best interest to make sure it maintains a good relationship with every single one of its suppliers.

This is exactly where effective vendor management comes in. Here are a few of its benefits.

  • Better Vendors - A clear and centralized vendor management system helps businesses create criteria for vendor selection. This, in turn, means that you're reaching out to a better selection of vendors aligned with your needs.
  • Better Contracts - Implementing a vendor management strategy helps the business stay focused on its immediate needs and negotiate contracts with these goals in mind.
  • Better Performance Tracking - Proper vendor management ensures that a business has a system for tracking what is working and what isn't with their vendors.
  • Good Vendor Relationships - Having a system for managing multiple vendors helps a company spend an equal amount of time interacting with each supplier, increasing the likelihood of forming mutually beneficial relationships.
  • Value for Money - When done right, a vendor management system helps the business get the best contracts with high-performing, long-term suppliers, which results in savings and improved earnings over time.

5 Steps of Effective Vendor Management

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It's clear that a working vendor management strategy is important for any business. However, the challenge with vendor management is that there isn't a single process that works for all companies and suppliers. Still, most strategies will share these basic steps.

1. Set Clear and Actionable Goals

Any vendor management system needs to be hinged on clear business goals and objectives. This simple but important step helps the business understand its requirements and goes a long way towards preventing problems like redundancy in efforts and wastage of resources.

For example, if a restaurant needs to source a steady supply of pork and beef, one of its vendor management goals would be to find a reliable meat supplier and close a long-term contract to get the best prices.

Having clear milestones or objectives makes it easier to evaluate each vendor's performance as the goals themselves help in identifying the proper vendor management metrics. For instance, based on the earlier example, the company may select product quality and cost savings as the top metrics to track.

2. Create a Vendor Management Team

After the business goals and objectives have been identified, the next step is to establish a dedicated team to manage the company's vendors. The team will be responsible for choosing the appropriate vendor management metrics, identifying reliable suppliers, negotiating advantageous contracts, evaluating the performance of each vendor, and tracking transactions.

For small businesses, creating a dedicated team may seem like too big of a step, especially when resources are tight. But the idea is to select individuals in the company to be responsible for vendor management rather than do things on an ad hoc basis. It doesn't have to be an entire department - even a small team with a few managers will do.

3. Create a Vendor Selection Criteria

At this stage, the objective is to select the criteria for choosing vendors. This allows the vendor management team to segment vendors based on metrics such as-

  • Total spend
  • Volume of transactions
  • Product quality
  • Risk
  • Profitability
  • Vendor performance
While businesses tend to look at the cost as the most important criterion for vendor selection, a growing number of companies are looking at other factors when deciding which vendor best meets their requirements. For example, a Staffing Industry Analysts study found that 54% of businesses looking for staffing companies (for contingent workers) considered worker quality as the most important criterion.

4. Vendor Selection

This stage involves the actual selection of vendors and, if applicable, the bidding process. Either way, the vendor management team needs to analyze each submitted proposal to understand its scope, pricing structure, and whether the supplier can meet the company's requirements.

While the traditional process for third party vendor selection and contract negotiation is focused on price, buyers can unlock more value from their vendors if they collaborate with them. This allows the business to understand each vendor's best practices for using their products and services.

5. Contracts and Evaluation

Finally, it's time to complete the contracting process and bring the vendor/s onboard. This stage is highly dependent on the company's financial and management processes. In any case, it's important that the vendor management team measures each vendor's performance by going back to the identified business goals and metrics. Companies should talk to their suppliers to take improvement actions (if necessary) or plan for changing needs.

How to Track and Measure Vendor Performance

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Vendor performance management is a sub-activity of vendor management that focuses on monitoring and measuring supplier performance. It allows the company to improve profits and efficiency by maximizing the value it gets from its network of vendors. More specifically, tracking performance leads to-

  • Optimized stock levels, preventing stockouts and high inventory carrying costs
  • Increased customer satisfaction
  • Discovery of hidden cost drivers
  • Reduced sourcing cycle times

While easy to define, measuring vendor performance can be difficult to maintain on a long-term basis. Below are a few best practices for getting it right.

Track Price Metrics - As mentioned earlier, the traditional way of choosing vendors is by focusing on price. The same holds true when measuring vendor performance. To determine whether the vendor is staying within the company's price requirements, consider tracking inter-period changes in pricing. For example, a metric such as percentage price change year-over-year' will show increases or decreases in quoted prices expressed in a percentage.

Track Cost Metrics - Another way to quantify the impact a vendor has on a business is by tracking cost. This makes it possible to see not just how much money is leaving the business, but also the kind of ROI it's getting from vendors. Taking this step also helps the business set cost reduction targets by comparing the historic cost baseline for a vendor's goods with their cost impact.

Engage Vendor Relationship Managers - The people responsible for keeping tabs with vendors can offer a wealth of qualitative business intelligence that often goes to waste. For example, business relationship managers tend to know if there's an issue with a vendor far more quickly than any metric or data report will show.

Communicate with Vendors - Be sure to stay in touch with vendors by keeping lines of communication open and proactively engaging them, whether it's by bringing them to your facility every quarter or sharing your data with them in a monthly conference call. By engaging vendors, the business can maximize the value it gets from them. This is especially important for critical or high-risk vendors whose goods or services play a vital role in keeping the business running.

Of course, all of this begs the question - how often should companies conduct vendor performance reviews? Ideally, reviews should be done on an initial and ongoing basis.

The initial performance review can be done after the first 90 days of acquiring the vendor's goods or services, as this gives the business enough time to measure raw data. Next, reviews can be conducted annually, semi-annually, or quarterly, depending on vendor type (e.g., high-risk, non-customer affecting, or back office).

Automated Inventory Ordering Systems & Vendor Management

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The growing complexity of modern supply chains has made it harder for businesses to maintain records of all of their vendor transactions using manual tools. While spreadsheet programs were sufficient in the past for crunching numbers, they cannot perform more advanced tasks like tracking supply chain data in real-time or providing actionable inventory insights.

The good news is that there are automated inventory management tools specifically designed to help businesses develop a clear and structured vendor relationship management process. These tools can automatically populate reports with key vendor data during each sourcing cycle, saving hundreds of hours spent on the process.

Other benefits of automated inventory ordering systems include-

  • A quick and streamlined vendor onboarding process
  • Centralization of billing rates, invoices, contracts, and payment options
  • A comprehensive dashboard for managing vendors
  • Better compliance and security management
  • Integration with accounting (e.g., tax forms)
  • Dedicated portals for vendors to update their information and get updates on payments and transactions
  • Integration with the company's existing IT infrastructure and/or enterprise resource planning programs

What to Look for in Automated Ordering Solutions

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The sheer variety of inventory ordering solutions on the market can make it difficult to choose a software product. Apart from industry-specific requirements, a business can have specific needs and/or business goals that need to be met. At the very least, the replenishment solution of your choice should be able to do the following-

  • Process vendor requisitions and purchases
  • Manage time and expenses
  • Handle invoicing and payments, with automation features for information fields and scheduling
  • Consolidate billing
  • Manage vendor company information and vendor candidate information
  • Scale with the company's growth
  • Offer support for multiple devices
  • Provide customizable analytics and dashboards showing vendor performance and other pertinent data

Vendor management is a crucial process that separates successful companies from the rest. When done right, it not only helps the business establish close relationships with suppliers, but it can also reveal opportunities for maximizing profits and efficiency.

Ultimately, companies with effective vendor management systems are better equipped to avoid the risks associated with supply chains and reap the full benefits of working with third-party vendors.