To fulfill your business’s mission, you need to develop strong and lasting relationships with your suppliers. Adopting vendor management best practices will help you forge a stronger bond with your suppliers by working toward mutually beneficial agreements for both their company and yours.
No matter if you work with one supplier or hundreds, your business must have an efficient vendor management system to assist with organizing contract terms, points of contact, financials, and more. From supplier selection and onboarding, to vendor contracts and risk mitigation, there are several steps that buyers should consider taking to smooth out their vendor management process, saving them both time and money.
Every effective vendor management policy is structured to elicit a win-win scenario on both sides of the relationship. By following these steps, your business can reap the many benefits of a streamlined vendor management process.
What is Vendor Management?
Before diving into the details, it’s important that you first understand what vendor management is, and what qualities make it effective. The basic logic that underpins vendor management is that businesses rarely have all the resources to execute projects and fulfill business objectives on their own. Instead, they must turn to external resources from suppliers.
However, the process of acquiring and managing several suppliers with different points of contact, pay rates, and contract terms can add immense complexity to an already complicated and highly dynamic buyer-vendor ecosystem. That’s why a smooth vendor management process can be quite valuable and contribute to better supplier relationships.
The Six Vendor Management Process Steps
Most vendor management strategies are broken into six steps in vendor management that help organize and solidify a buyer’s relationship with suppliers. In chronological order, these are:
- Establish business goals: Before enlisting the help of a vendor, establish SMART goals for vendor management so both you and your prospects understand what needs to get done.
- Vendor locating and selecting: Thoroughly analyze every vendor prospect to ensure that they have the resources, experience, and personnel to satisfy your goals and KPIs.
- Risk assessment: Exercising due diligence to ensure that every prospect is transparent regarding key metrics such as total annual spend, on-time delivery rates, and aggregated internal risk assessments.
- Contract negotiation: Reach mutually beneficial contract terms and agree upon risk KPIs for performance monitoring.
- Supplier onboarding: Collecting the documentation required to process and set up a company as an approved vendor.
- Risk mitigation and monitoring: Collect necessary data for frequent, ongoing risk reporting and ensure vendor due diligence.
Together, these steps constitute the basic framework within which most vendor management systems align themselves. As you can tell, the trick is not to simply find the most convenient supplier and talk them down to the lowest possible price—rather, the key is to work in harmony with vendors and prospects to ensure that you’re receiving the greatest long-term business value at the lowest acceptable level of risk.
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Step 1: Share Goals, Establish Priorities
No vendor management strategy can go forward without first setting forth clear and measurable smart goals for vendor management that are rank-ordered for prioritization purposes.
Once your business objectives are agreed upon, you should consider sharing with vendors and prospects. This way, you and your prospects can establish rapport and set an objective-oriented framework for regular and virtual meetings.
Consequently, you will open up a line of communication between you and the vendor based on mutual respect for each other’s strategic goals and KPIs, thus strengthening accountability and responsiveness.
By communicating your business objectives to prospects and vendors, the vendor can forecast your needs and anticipate inventory fluctuations to assist you better. As the vendor-buyer relationship progresses over time, ensure that you review your objectives and approve or disapprove changes as needed to reflect your changing operational goals.
Step 2: Identify and Select the Right Vendors
The second step is to locate the vendors most capable of fulfilling your business’s written objectives with the most acceptable degree of risk. It is important to note that this process sometimes resembles an art more than a science since it requires a delicate balancing act between trying to acquire competitive bids while still assuring prospects with some degree of commitment.
Once you have selected vendors that present the greatest amount of value for your organization, you should consider singling out at least one of them to forge a strategic partnership.
Ensure you include this mission-critical vendor into your product meetings, so they have a say in voicing their concerns. A key aspect of vendor-buyer management is building trust and mutual support, and this is an excellent way of achieving that.
Finally, you should focus on forging long-term relations with vendors, especially those you deem to be strategic partners. With them, marginal cost savings and maximizing short-term savings should not be your key priority.
Remember, changing vendors and migrating their data into your existing vendor management processes can be costly and time-intensive—therefore, think long-term when it comes to onboarding your most important suppliers.
Step 3: Negotiate a Win-Win Outcome
The optimal scenario for a contract negotiation is to arrive at mutually agreeable terms that satisfy both your company’s needs and your supplier’s. However, this isn’t possible without first knowing your supplier’s business objectives.
It’s important to keep in mind that your vendor is looking after their bottom line, just like you are. Therefore, the more pressure you put on them to reduce costs or speed up delivery time will likely see a commensurate reduction in service or product quality.
For this reason, it’s best that you take the time to research your vendor’s business model to understand how you can ensure their profitability, and how this process is consistent with ensuring your own.
Once you’ve taken care of this step, you can proceed to negotiate in good faith. Check your strong-arm bargaining techniques at the door, and instead work collaboratively toward an agreement that makes both parties feel confident about the terms of the deal.
Step 4: Monitor KPIs and Maintain Communication
It’s often taken for granted that suppliers will perform to the standards set forth by your contracted terms. However, the reality isn’t always so rosy. This is why it’s crucial that every CFO and business owner continuously monitor the performance of their suppliers from the beginning to the end of the contract.
There are several key areas that business owners should pay attention to when assessing their supplier performance. Ultimately, the specific metrics will vary according to one’s industry. However, there are a few near-universal performance metrics that most vendor management policies will zero-in on, including:
- Order completion time
- Shipping time
- Call answer time
- Service quality
- ASN accuracy
You will notice that many of the above KPIs find a home in most supplier evaluation criteria. Ensure that your vendor management systems track these performance metrics and that you evaluate them thoroughly during service adjustments and contract reviews.
Open, honest, and transparent communication between you and your suppliers will ultimately be a determining factor in whether you can forge a lasting, mutually enriching relationship.
To avoid misunderstandings, needless headaches, and hair-splitting frustration, schedule regular face time with your suppliers to get a better understanding of project completion timelines and long-term forecasts for product delivery.
Step 5: Invest in the Right Tools
In an increasingly globalized and connected world, it makes little sense to store enormous amounts of procurement-related data on local hard drives and spreadsheets. Relying on a manual system such as this is bound to result in headaches, human error, and plenty of time-consuming footwork.
This is why it’s critical that companies invest in appropriate tools to organize big supply chain data that extends across potentially thousands of firms around the globe. By investing in vendor management software, companies can make better use of their data, organize it using automated technologies, and securely store it in the cloud.
The truth is that manual vendor management systems tend to be outdated and highly labor-intensive which can lead to frustration and disrupted workflows. By contrast, automated supply management systems update master vendor files automatically and avoid human errors such as incorrect data entries or duplicate files.
Whether you’re looking for an IT vendor management system to organize relations with third-party vendors or general vendor management services to help solidify your supply chain, you need the right processes in place to reach your organizational goals.
A great place to start is investing in vendor management software to mitigate vendor risks, automate payables, and assess performance metrics.
Take the Hassle out of Your Vendor Management Process
There’s no one-size-fits-all solution for managing the complexities of vendor-buyer relations. However, there are tools available that can make this job a lot easier—for both you and your suppliers.
Fortunately, automated bill payments to your suppliers can be utilized to streamline your vendor management. From providing a vendor management policy template to reducing vendor risk and increasing cost savings, there are numerous benefits to migrating your pen-and-paper vendor management strategy to an electronic system.