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• Vendor management refers to the set of activities an organization undertakes to optimize its working relationship with its suppliers.
• Vendor management activities involve cost management, risk management, contract negotiations, and performance evaluation.
• The scope of vendor management varies with the size of a business, the number of suppliers, and the industry in question. The vendor management process is part of a company’s overall procurement strategy. There need to be comprehensive objectives a business is aiming for in its vendor management activities.
The Vendor Management Process
Vendor Selection
The vendor management process begins with a selection of suitable vendors based on what the organization needs. This includes sending out requests for quotations and requests for proposals. Besides looking at the price quoted by a vendor, it’s also important to consider their track record and capacity to handle contracts of a particular magnitude and specifications. Other important considerations are the vendor’s style of communication and culture.
Contract Negotiation
The contract design and negotiation are an important part of the vendor management process because it defines the rights and responsibilities of both parties. It needs to be as detailed as possible so that it provides a way to resolve any issue that may arise during the life of the contract. Sensitive but often overlooked areas in contracts include non-disclosure of important information a supplier may get when carrying out the contract. While such matters may lengthen negotiations, it’s better to address them early.
Onboarding of Vendor
This is the requisite paperwork that needs to be done before you start doing business with a vendor. You’ll need to establish communication methods, contact persons, ensure that the vendor has the correct licenses, and collect their banking and tax information. Having a vendor portal standardizes the process for all vendors, ensuring nothing is missed.
Vendor Performance Evaluation
Your organization needs an objective way to assess vendor performance. You need to ensure that there are clauses in the contract that explain in detail their responsibilities and the yardsticks for evaluation. Performance needs to be tracked consistently from one period to the next so that it becomes possible to identify trends and justify any corrective actions.
Risk Management
Dealing with multiple vendors requires constant risk monitoring because their actions can negatively affect the company. For instance, if a vendor is facing regulatory issues, this may affect their ability to perform contractual obligations. This requires quick contingency planning to avoid a disruption of operations. Another scenario would be where working with a vendor poses a reputational risk for your business. This may necessitate the cancellation of their contract.
Benefits of Proactive Vendor Management
When a business is actively monitoring its working relationship with vendors, there are numerous benefits that will accrue.
Better Selection
The vendor selection process involves finding vendors who meet a set criterion. This means that the business will work with vendors that have a higher likelihood of performing according to expectations. There will be less churn, which often leads to disruptions and expensive selection processes. In addition, monitoring performance trends for various vendors helps to maintain standards at a high level.
Proper Contract Management
Vendor management involves gaining visibility into all the contracts a business enters. Contacts are kept in a centralized repository, where it’s easy to retrieve and refer to them. The business can hold vendors accountable while honoring its own responsibilities to the vendors.
When a contract has been followed to the letter, it makes the renegotiation and renewal much easier. In fact, healthy contract management is essential for strong relationships with vendors.
Better Value for Money
When a business takes time to select vendors, it will end up getting more value for its procurement spend. First, vendors may be evaluated in terms of price. However, beyond that, the selection process will look at the capacity of potential vendors as well as their reputation for quality. Vendor management involves making strategic decisions such as working with fewer suppliers for better contract terms. This can translate to significant savings for the business.
Challenges Experienced in Vendor Management
Despite the best efforts to ensure vendors perform as expected, some challenges may still arise. Vendor compliance risk is the likelihood of a vendor not meeting the performance laid out in the contract. Poor quality goods and services will ultimately affect your own quality. As such, you may need to cut ties with such a supplier and do a new selection process.
A challenge may arise when you don’t have a central electronic repository for your vendor data. This means that you have low visibility into your vendor activity. Without a dashboard to track performance, you will never know when performance is dipping until perhaps it’s too late. To prevent this, it’s best to go for vendor management systems that allow you to collect crucial data and incorporate analytics into crucial decision-making.
Invoice payments management is another common challenge in vendor-supplier relationships. Often, suppliers will have different terms. A business has to do a great cash management job to ensure it meets all obligations as they fall due.
Implementing a Vendor Management Strategy
To craft and implement a vendor management strategy, adherence to certain best practices is required.
The business needs an overall strategy that it’s trying to fulfill. The vendor management strategy ought to support the bigger strategy. In addition, there must be a set criterion for vendor selection. For this to work, the business may need to establish a vendor management team with representation from the different stakeholder departments within the business.
Vendor management systems make the processing of managing vendors a lot easier. The business can benefit immensely from automating certain tasks, creating a self-service portal for vendors, and having a central place to store contracts. If your business requires a vendor management system, get in touch with ProcurePort. ProcurePort is the world’s leading provider of e-procurement solutions to help businesses manage their P2P activities optimally.