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• Most companies rely on secondary systems to store and manage information on their vendors. Most times, it is an accounting or payables management system.
• Yet, such systems are not sufficient in an environment where the company has tens or hundreds of vendors. Companies can get away with this when the supply chain is static.
• However, when disruptions such as the one caused by the Covid-19 pandemic happen, companies suddenly realize they are ill-equipped to respond.
The lack of proper vendor management often means companies are flying blind. They do not know about the vendors’ key capabilities, weaknesses, or any risk a vendor poses to their operation. This happens when a company is unwilling or unable to assess and respond to hurdles in the vendor management process. Here is a list of vendor management problems procurement managers need to overcome.
The Lack of a Clear Policy
Companies require a policy on the selection and evaluation of vendors. It should be clear what metrics they use to award contracts to vendors. The lack of policy could mean that the company risks giving important contracts to vendors without the capacity to deliver items with precise specifications. Such vendors may also be unlicensed or be in violation of governance laws or operating unethically. Internally, the lack of a policy on vendor selection may leave room for fraud through collusion between staff and vendors.
Policies on vendor performance are a great way for a company to protect itself by reserving the right to revoke contracts due to vendor non-performance.
An unwillingness to progress away from manual operation and management of information could stand in the way of proper vendor management of information. When information is stored in silos, it’s difficult to use to establish patterns and relationships that would otherwise be useful. When information is centralized, the company can keep tabs on expiring vendor contracts and start to negotiate new ones early. They can keep track of how vendor prices are changing over time alongside other metrics of performance.
Replacing manual processes with automated solutions can also lead to significant savings for the business. The business may also increase the speed and accuracy of verification of invoices, which goes a long way in improving relationships with vendors.
Another common vendor management problem is the failure to keep an accurate record of vendor information. It’s expensive when vendor information has to be collected and updated manually. Outdated information often slows down information when files are sent to the wrong addresses or payments are made to non-existent accounts.
Therefore, vendor portals are important for businesses that work with numerous vendors. The vendors can update their information when it changes. They can upload certificates and licenses as they get renewed. A vendor portal also allows vendors to maintain their catalog so that they are considered for upcoming opportunities.
The onboarding process in any organization is critical in ensuring that there is synergy between an organization’s policies and culture with those of the vendor. A quality assurance officer should be involved in vetting potential vendors for anything that could easily trigger misunderstandings between the parties in the future. During onboarding, both parties need to be clear about their responsibilities in the contractual relationship.
Incomplete Contract Negotiations
The contract development phase needs to be thorough so that nothing is left to chance. Both parties must agree on payment terms with vendors. The parties need to agree on price-setting mechanisms so that changes do not result in drawn-out disagreements. It’s important to also detail the circumstances under which either party can opt-out of the contract.
Where a party will gain confidential information about the operations, finances, or trade secrets of the other party, there should be clauses that restrict sharing such information with third parties. In situations where a vendor creates an innovation or new intellectual property in the execution of the contract, ownership of such property needs to be determined early enough. When these clauses fail to be included in the contract, they may result in expensive legal battles later in or after the life of the contract.
Over-reliance on a Vendor
Another common vendor management problem is when a company relies too heavily on a particular vendor. Over time, this may happen unknowingly when there is no dashboard to show how the procurement budget is distributed. Over-reliance on a vendor may leave the business too exposed should the vendor experience capacity issues or any other type of disruption.
As such, in the vendor management process, it’s important to assess the risk that arises with procuring heavily from one vendor or one geographical area.
Best Practices in Vendor Management
Certain best practices can help overcome vendor management challenges. First, they must develop proper policies regarding how they shortlist, vet, give contracts, and onboard vendors. In addition, they should have a system to maintain contracts with vendors. A modern contract repository helps companies maintain the visibility of all their contracts. They can easily retrieve important metadata from a contract. It’s easy to highlight any violations when they occur.
Companies must also evaluate the risk that comes with working with particular vendors. Whether financial or reputational, the company should not take on too much risk. The business must keep in touch with developments in their industry, including news about vendors they work with. Lastly, all contracts should have a methodology for resolving disputes.
As highlighted, visibility is crucial in any attempt at vendor management today. Having the right software to digitize manual operation is imperative. ProcurePort’s e-procurement solutions can help you manage contracts with vendors more efficiently. You can have a contract repository as well as a portal for onboarding vendors and maintaining their information. You can also begin integrating analytics in making important decisions regarding vendor performance.
Reach out to ProcurePort for a consultation on your e-procurement needs.