Estimated reading time: 5 minutes
• Vendor management is the sum of all activities a company undertakes to maximize the value of the relationship they have with its vendors. This includes but is not limited to listing probable vendors, comparing prices, quality checks, cost control, and risk management.
• Effective vendor management takes combined efforts across departments and therefore purchasing departments cannot work in isolation. With information being widely available today, stakeholders expect management teams to do all that is possible to maximize value from their procurement efforts.
The Vendor Management Process
The vendor management process starts with a clarification of what the overarching organizational goals are. The corporate goals then intertwine with individual project goals. There should be synergy between the two levels of goals such that the latter gets you closer to the former. Project goals inform the vendor objectives and the vendor selection criteria. From the project goals, you can create a list of success factors which you will then use to pick your vendors.
The next step is the actual vendor selection process. You can categorize potential vendors according to their strategic importance and apply different criteria for each. For instance, for mission-critical supplies for your operation, you’d want to deal with a few vendors that can supply in bulk. You’d want to properly vet their capacity. Tier 2 and tier 3 are easier to replace and a halt in their delivery would not completely disrupt your operations.
Besides capacity, you’d want to profile potential vendors’ reputation, location, and financial position as part of your due diligence. Each vendor presents a level of risk to your company. It’s only prudent to deal with those that represent the lowest risk.
The next step in the vendor management process is contracting. The negotiations involve the finance and the legal teams as well as the senior management. It’s important to involve the legal team to ensure that the language used in the contract does not present an undue risk for the company. This explains the need for contract creation tools that allow collaboration across departments.
The Benefits of Vendor Management
Active vendor management results in numerous benefits for a company.
The most visible benefit is better vendor selection owing to there being set criteria stemming from corporate objectives. You will work with vendors who complement your own company’s working methods, thus reducing the risk of disruptions due to non-performance or violations of regulatory codes. Vendor management also ensures more efficient contract management. By continually monitoring vendor performance, you will note and investigate such things as rising costs. Switching vendors or renegotiating contracts are examples of vendor management actions meant to control costs.
In the long-run, vendor management benefits far outweigh the costs of actively doing so. The company will also reap the benefits of better vendor relationships. Vendor management opens a feedback loop whereby vendors know what they need to improve upon. Vendors who perform better are likely to earn longer and bigger contracts, thus creating a positive incentive.
Challenges that Surround Vendor Management
Certain factors often get in the way of proper vendor management and as a procurement professional, you need to be on the lookout. The first is vendor compliance risk. This is a slight chance that a vendor has not complied with statutory requirements in their industry. They also need to comply with your own internal standards. Your organization, therefore, needs to have a methodology for continuously monitoring the credentials of vendors. It gets even more complicated when sourcing from vendors in different jurisdictions. It may require you to work with local consultants to make determinations on the validity of credentials.
Another challenge in contract management is often visibility into contracts. When tens of contracts are running concurrently, it may be difficult to quickly retrieve important data and metadata on each unless you have a single storage solution that you can query. Improving visibility helps us to allocate resources better and to get the best out of each contract.
Vendor reputation risks are another major challenge in contract management. While a vendor may propose very attractive terms financially, you must run a background check on them. How have they delivered on past contracts? Are there news articles about them and are they positive? If possible, you should reach out to past clients and find out what their approach to contract performance is like.
Best Practices in Vendor Management
Proper Communication of Expectations
When selecting and contracting a vendor, be clear about what your business goals are and what expectations you have of the vendor in terms of performance and compliance. Find ways to align your expectations and pursue mutually beneficial targets.
KPIs
Besides establishing performance expectations, you should have key performance indicators for the various metrics you’ll use to assess vendors. For instance, you might use more than one KPI to measure vendor quality. These many include timely delivery, accurate quantities, adherence to specifications, and warranties.
Risk Assessment
We’ve already highlighted the need for risk management as part of vendor management. It needs to happen periodically because new risks tend to emerge, and existing ones are evolving. New regulatory requirements may come up, or the business environment in a certain jurisdiction may become unfavorable. You need to remain agile and be alive to such changes.
Role of Technology
Vendor management tools play a role at every step or activity in vendor management. Technology can make it easier to onboard your vendors and allow them to upload and update their credentials and catalogs via a portal. Suppliers can also easily request invoices payment to be remitted to specific accounts or locations. Contract management repositories allow safe storage of all your contracts with the ability to track key events and upcoming deadlines, and expiry dates.
ProcurePort is the world’s leading provider of e-procurement software, including vendor management tools. Schedule a call with us to discuss your vendor management needs and pick the best solution for you.