Importance of Vendor Management in Procurement
Vendor management and procurement are a combination that companies cannot choose to ignore. Vendor management is essential for the smooth functioning of the organizational supply chain and related processes. The supplier’s capability, production practices, and delivery time must be considered while choosing the vendor. Earlier, the procurement function did not give much importance to vendor management, now the scenario has changed due to globalization of the supply networks and fierce market competition. CPOs have realized the importance of having strong vendor engagement and management practices in place.
What is vendor management?
Vendors are business individuals that provide input materials, goods, or services to an organization, helping them deliver their end-product to the user (consumer). Traditional supply chain processes considered vendor management as a simple process that involved choosing the vendor giving goods at the lowest price. The vendor management function has much more to it, it involves several activities like sourcing, requisition management, obtaining quotations, negotiating price, engaging, managing vendors, and ensuring timely payments. Effective vendor management streamlines the organizational supply chain.
Why is vendor management important for procurement?
Having a strong vendor management system is crucial for an organization because it can impact the business’s bottom line and cause a financial loss when not managed well. Having an effective vendor management solution is important for the following reasons:
- Improper or inefficient vendor management disrupts the entire supply chain. Major disruptions may also result in a total halt of the supply chain, which adversely impacts the business’s bottom line.
- Vendor performance and adherence to SLAs are essential for smooth business operations. Vendor management ensures that businesses benefit from supplier relations and vendor risk is minimized.
- Having a vendor management system accelerates the vendor onboarding process by automatically obtaining relevant vendor information and feeding it into the system for fast and error-free approvals.
- A vendor management system curbs maverick spending in the organization and helps obtain contracts at pre-negotiated rates. The financial outcomes in the organization can be efficiently managed with a vendor management system.
- The vendor management system strengthens and establishes long-term vendor relationships, which improves business margins and enhances logistic operations.
What is vendor management software?
Vendor management software (VMS) is the type of software that enables smooth communication, project communication, and payroll management for companies employing contractors and freelancers. A vendor can be a supplier, manufacturer, contractor, or anyone who fills a need that is not created or provided in-house.
A vendor management system manages the entire spectrum of vendor relations – from acquiring the vendor to issuing paychecks, all the functions in between. Vendor management solutions ensure that all vendor expectations are clearly communicated and reviewed before a job begins. Supplier management software is a useful and cost-effective investment that enables a business to manage vendors, integrate their needs, and align their expectations with organizational objectives for smooth supply chain operations.
Common vendor management software terminologies are VOP (vendor on-premises), MSP (managed service provider), and VMO (vendor management office). Vendor on Premise refers to the vendors that work onsite. The VOP option is useful when the company is experiencing high turnover. Managed service providers are used to support specialized fields. The vendor management office is sometimes associated with the human resource department and sometimes works as a standalone function.
Vendor management services cover 3 main functions, namely, vendor engagement, project management, and payroll management. Vendor engagement provides effective and accessible communication channels between buyer and supplier for quick and easy communication. Project management is another feature of vendor management software that helps in task assignment, work coordination, process tracking, and other functionalities. The payroll management feature in vendor management solutions simplifies vendor and contractor payment, contract, and expense management.
Components of a Vendor Management System
Having a vendor management process is important to have financial stability for a business. Comprehensive vendor management software solutions must cover the entire spectrum of vendor engagement and management. 5 must-have components in a vendor management system are mentioned below:
Vendor risk management:
the process of identifying, assessing, and mitigating risk in the supply chain of the organization is the main intent of vendor risk management. Effective vendor risk management software reviews and monitors vendor performance actively and builds a contingency plan to address any type of risk.
Visibility of spend:
transparent spend management helps eliminate maverick spending and hidden costs in vendor management. Automating vendor expense management brings transparency and visibility into spending.
Vendor categorization (segmentation):
mapping suppliers against exposure to risks and profitability is called vendor segmentation. There are several methods available for categorizing or segmenting vendor bases. The Deloitte priority model categorizes vendors based on business criticality into strategic, important, and transactional. The Kraljic Matrix method classifies vendors into 4 groups based on their risk and profitability.
Vendor performance review and management:
a vendor management system must proactively measure and analyze the performance of vendors in order to derive maximum value out of the contract. Performance review and management also ensure cost savings and mitigation of risk.
vendor relationship management software enables seamless collaboration between vendors. Cloud vendor management tools help organizations create a supplier network with enhanced visibility and collaboration.
Supplier management software solutions must address all the components of vendor management. Enterprise vendor management software helps businesses establish long-standing, profitable vendor relationships. Supplier management software ensures timely payment to vendors and compliance.
Understanding the Vendor Management Lifecycle
Vendor management software is based on the vendor management lifecycle. Understanding the vendor management lifecycle is important to design an effective vendor management software. The vendor management lifecycle is made up of 5 major steps.
Step 1: Vendor qualification
The first step of vendor management is to determine whether the vendor has the capability and expertise to fulfill business needs. Supplier qualification software automatically qualifies the vendor based on pre-set qualification parameters. A vendor compliance management software can be used for ensuring compliance standards are met by the vendor. Vendor qualification is of 2 types, pre-qualification for potential vendors and re-qualification for assessment of active vendors.
Step 2: Vendor onboarding
Qualified vendors are then onboarded into the company’s database. Supplier or vendor onboarding software automates vendor onboarding by automatically gathering, capturing, and storing relevant information on qualified vendors into a centralized supplier management database. Vendor registration software is used for registering the vendor with the company. A list of vendors is maintained by the VMS.
Step 3: Ordering and Delivery
The order process is initiated by the purchase order or the vendor contract. The details of the order are listed out in the terms of reference (TOR) or SOW. Once the order is delivered, the goods received are checked for quality. Vendor performance is also evaluated by supplier management tools.
Step 4: Payment of vendors
Once quality inspection of goods is successful, vendor payment is initiated. The vendor payment management software verifies the data on the invoice against the purchase order and goods received a note to ensure that data is consistent across all documents. Successful match initiates payment to the vendor, while mismatching in data results in rejection of the invoice.
Step 5: Vendor offboarding
Offboarding of a vendor is required when the contract ends for a long-term vendor or when a one-time order is completed. Vendor offboarding entails the removal of the vendor details from the finance and administrative records of the company. Effective vendor data management is essential at all stages of vendor relationship management, from onboarding to offboarding.
Advantages of Using Vendor Management Software
Manual vendor management tools complicate and decelerate the vendor management processes. Automation of vendor management structures and streamlines all vendor management processes. Vendor monitoring solutions can be used for tracking vendor activities, performance, and payments. Digital vendor management software maintains supplier scorecards based on supplier performance and track record. Vendor compliance tools, supplier performance monitoring tools, vendor onboarding, and offboarding tools, and vendor invoice processing tools are available in vendor management services (VMS).
Some of the benefits of using supplier management tools are:
Easy vendor onboarding and offboarding – registration of vendors can be done quickly with VMS. Upon termination of a vendor contract, offboarding vendors from the finance and admin database can be automatically done by the vendor management solution.
Comprehensive vendor rating:
vendor management software enables comprehensive vendor rating based on key performance metrics like compliance, quality of delivery, timeliness of delivery, etc.
vendor management software empowers the vendors to manage their profiles by updating information and receiving the order and payment alerts automatically.
Quick vendor screening:
retrieval and verification of supplier data like business reports, credit risk data, and financial data are easy with vendor management software.
vendor performance tracking through supplier monitoring tools initiates the necessary corrective actions or offboard the vendor depending on the severity of the issue.