What is vendor management?
Businesses usually do not have adequate resources to execute projects and fulfill business objectives on their own. They often turn to external resources from vendors to fulfill their resource requirements. The buyer-vendor ecosystem may be simple or complex depending on the size and scope of the business. Acquiring and managing several vendors, handling different points of contact, pay rates, and contract terms can get unmanageable for businesses. This is where a well-drafted vendor management process can help businesses manage vendor relationships.
What is the definition of vendor management? Vendor management is a discipline that enables organizations to manage their suppliers or vendors. Vendor relationship management includes activities like choosing vendors, negotiating purchase contracts, controlling, and managing costs, ensuring quality and timely delivery, and reducing vendor-related risks. The vendor management process is responsible for managing relationships with vendors.
Effective vendor management empowers businesses to make data-driven buying decisions. Managing vendors requires a complete understanding of how vendors work, their pricing quotes, and discounts. Having a vendor management process in place enables the procurement team to evaluate vendors, source and obtain pricing information, gauge their quality of work, evaluate vendor performance against organizational standards, and ensure that payments are made on time.
Role of Vendor Management in Procurement
Vendor management is a structured program for managing suppliers and improving their impact on the buyer’s business. Vendors are key stakeholders in the procurement process. The vendor management process is an important part of the procurement cycle that focuses on ensuring that third-party relationships are successful and supplier risk is mitigated. For successful procurement operations, managing and establishing strong vendor relationships is important.
From choosing the right vendor to ensuring the quality of deliverables – vendor management takes care of everything. Efficient vendor management ensures the smooth functioning of the procurement function and reduces the risk of supply chain disruption. Vendors are chosen based on vendor performance, reputation, and quality, and timely delivery of goods/services.
Staying updated on vendor pricing and discounts enables businesses to save on the cost of purchases. Stronger relationships with vendors enable buyers to negotiate better rates. Establishing long-standing vendor relationships also helps in getting regular discounts on the price of goods and services. Information regarding price hikes is passed on to buyers in advance so that they can plan their purchases before new prices are introduced.
Compliance with organizational policies and regulations is easier with a vendor management process in place. The risk associated with vendors is also considerably low when your procurement function has a vendor contract management system in place.
Challenges in Manual Vendor Management
Managing a handful of vendors may entail minimal effort in terms of contract and payment management. Vendor management for small businesses may seem like a straightforward process that can be executed through manual efforts by the procurement team. Sourcing and vetting new vendors, negotiating terms and drafting a contract, contract approval, subsequent payment of invoices, etc. are some of the tasks in vendor management. As the scope of a business expands, vendor management requirements expand proportionally. Problems with manual vendor management like inaccurate results, delay in purchase order and invoice approval, and data errors, can cost a business dearly.
A vendor management system helps overcome the vendor management issues mentioned above, and also strengthens vendor relationships that provide long-term business benefits.
Vendor Management Process
IT Vendor management process helps achieve business goals effectively. Establishing strong, long-term buyer-vendor relationships is easier when you have a vendor management and buying system. The vendor management process workflow involves several steps like vendor vetting, onboarding, purchase requisitions, order confirmation, purchase orders, and vendor performance management.
The vendor management process can be divided into 6 steps:
1) Establish business goals:
the first step is to set clear business goals like streamlining vendor management for improving efficiencies, ensuring that contract agreement terms are mutually beneficial, and managing and controlling costs. The main intent of setting business goals is to gain a complete understanding of buyer and vendor roles. Once business goals are set, the next step is to share them with vendors and prospects. Knowledge of your business goals aids vendors in forecasting business needs and inventory fluctuations.
2) Locating and choosing vendors:
complete evaluation of every vendor prospect on the basis of experience, quality commitment, resources, and track record is performed while choosing the vendor. The choice of the vendor must be aligned with business goals and KPIs. Vendors that are most capable of fulfilling your business objectives. Once the vendor is chosen, the next step is to establish strategic vendor relationships. Buyers must focus on forging long-term strategic vendor management.
3) Risk assessment:
every vendor prospect should be scrutinized for compliance and transparency in key metrics like on-time delivery rates, total annual spend, and aggravated risk assessments.
4) Contract negotiation:
the buyer should reach mutually beneficial contract terms and agree upon risk KPIs for monitoring performance. To reach mutually agreeable terms, vendors’ business objectives also must be known. The vendor’s business model must be studied in order to understand how a mutually beneficial contract can be drawn between the two parties.
5) Onboarding suppliers:
gathering all the information required to process and set up a company as an approved supplier.
6) Risk mitigation and monitoring:
gathering data needed for frequent, ongoing risk reporting, and ensuring vendor due diligence.
For successful vendor management, a strategic approach to building and maintaining relationships with the chosen vendors is required. Good vendors are hard to come by, so it is important to nurture strong relationships with vendors. In order to maintain strong, long-term vendor relationships, you need to share complete information about your requirements in a timely manner. Also having clear vendor management strategic objectives helps businesses derive maximum value for their money. Building long-term vendor relationships provide long-term gains for your business and help build trust and commitment with vendors.
Importance of Vendor Management
There are several reasons why vendor management is important in a business. Vendor management services enable businesses to identify the right vendor for specific business needs. More importantly, companies can use vendor management to effectively reduce the risk of supply chain disruption and ensure that goods and services are delivered on time and to the expected standard.
Vendor management services can be used to achieve business goals by harnessing cost-saving opportunities and accelerating the vendor onboarding process. An effective vendor relationship management strategy aids companies to build good vendor relationships and create better opportunities to negotiate better rates.
Here are 7 reasons why vendor management is important for your business.
1) Mitigate risks:
vendor management best practices are effective in mitigating supplier risks in terms of vendor operations, regulatory compliance, and unforeseen cost implications. The vendor management system helps track suppliers and identify the risks. An effective supplier management process flow enables speedy and accurate verification of supplier information, tracking of vendor performance, and gathering supplier financial data for getting a broader picture of the risk level.
2) Optimize performance:
the performance of active suppliers in the vendor management system can be tracked and measured for periodic vendor appraisal. Vendor performance data is evaluated to ensure that the company is aligned to contract terms and complying with your needs for optimal performance. Tracking vendor performance continuously ensures proactive identification of challenges and improvement areas.
3) Reduce costs:
vendor management system in an organization increases visibility, which helps identify hidden costs. Strong vendor relationships also enable buyers to negotiate better rates by way of discounts and incentives that increase profit margins.
4) Establish long-term relationships:
identifying good vendors and strengthening relationships is an important part of vendor management. Ways to improve existing vendor relationships and establish long-term relationships is the main aim of vendor management. Sourcing good vendor profiles can also be done by a vendor management system.
5) Improve admin efficiency:
centralized vendor management helps drive significant admin efficiencies by providing a central hub for vendor master data and record keeping. Vendor challenges like increased admin labor costs, data errors, and loss of contracts can be handled efficiently through vendor management systems.
6) Increase onboarding efficiency:
onboarding vendors is more efficient and quicker with a vendor management system. Complete vendor information like their bank details, capability information, capacity details, and regulatory information are automatically input into the system for faster and error-free approvals and vendor onboarding.
7) Protect brand:
smooth handling of vendors through quick onboarding and timely payments protects the reputation of your brand. A vendor management system enables the smooth handling of vendors and also validates vendor information before onboarding so that your business remains unaffected due to unprofessional or unethical actions by vendors.