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Vendor Management: 5 Steps Smooth the Process

April 17, 2023
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To fulfill your business’s mission, you need to develop strong and lasting relationships with your suppliers or vendors. Adopting vendor management best practices will help you forge a stronger bond with your suppliers by working towards mutually beneficial agreements.

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.

What is Vendor Management?

Before diving into the details, it’s important to first understand what vendor management is and what qualities make it effective.

Vendor management is a system to facilitate and maintain the relationships between your organization and your suppliers or vendors. It includes elements such as:

  • Vendor selection
  • Contracts
  • Performance metrics
  • Risk analysis

Effective vendor management programs have clear, consistent policies and procedures. They are enforced and monitored routinely.

Why is Vendor Management Important?

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.

Vendor management empowers organizations to control costs, mitigate potential risks and ensure the delivery of promised services. The ultimate results are maximum value from vendor relationships.

Vendor Management Best Practices

The most impactful vendor management programs have the following qualities in common.

  • Straightforward policies and processes: These should be presented upfront to vendors to ensure their compliance. Organizations should enforce regulations consistently to minimize risks.
  • Automated and centralized contract management: Automation reduces the opportunity for human error. Centralization gives members of your organization easy access to vendor documentation.
  • Clear ownership of responsibilities: This eliminates potential frustrations and misunderstandings.
  • Defined metrics for success: These should be revisited regularly to ensure vendors are performing and meeting the needs of your business.

The 5 Vendor Management Process Steps

Most vendor management strategies are broken into steps that help organize and solidify a buyer’s relationship with suppliers.

From supplier selection and onboarding to vendor contracts and risk mitigation, there are several steps that buyers should take to smooth 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.

  1. 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.
  2. Select vendors: Thoroughly analyze every vendor prospect to ensure they have the resources, experience and personnel to satisfy your goals and KPIs.
  3. Negotiate contracts: Reach mutually beneficial contract terms and agree upon risk KPIs for performance monitoring.
  4. Assess and monitor risks: Exercise due diligence to ensure that every prospect understands key metrics such as total annual spend, on-time delivery rates and aggregated internal risk assessments. Collect necessary data for frequent ongoing risk reporting; ensure vendor due diligence.
  5. Invest in tools: Automated vendor management software helps consistently enforce vendor management practices. It saves time and centralizes vendor data.

Together, these steps constitute the basic framework for most vendor management systems. The goal 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 level of risk.

Now, let’s take a closer look at each of the five steps:

Step 1: Share Goals, Establish Priorities

Every vendor management strategy needs clear and measurable goals for vendor management that are rank-ordered for prioritization purposes.

Once you agree on business objectives, consider sharing them with vendors and prospects. This way, you establish rapport and set an objective-oriented framework for regular and virtual meetings.

Consequently, you will open a line of communication with 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 better assist you. As the relationship progresses over time, ensure that you review your objectives and approve changes as needed to reflect your evolving operational goals.

Step 2: Identify and Select the Right Vendors

Locate the vendors most capable of fulfilling your business’ objectives with the most acceptable degree of risk. It is important to note that this process is more of an art than a science since it requires a delicate balance between acquiring competitive bids while assuring prospects some degree of commitment.

Once you have selected vendors that offer value to your organization, consider forging a strategic partnership.

Ensure you include mission-critical vendors in your product meetings so they can voice concerns. This is an excellent way to build mutual trust and support.

Finally, focus on forging long-term relations with vendors, especially those you consider strategic partners. Ignore marginal short-term cost-savings opportunities from competitors.

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 suppliers’. However, this isn’t possible without first knowing your suppliers’ business objectives.

It’s important to keep in mind that your vendor is looking after its bottom line, just like you are. Therefore, if you put pressure on them to reduce costs or speed up delivery time you’ll likely see a commensurate reduction in service or product quality.

For this reason, it’s best that you 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. Instead, work collaboratively towards 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. 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 watch 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, including:

  • Order completion time
  • Shipping time
  • Call answer time
  • Service quality
  • Advance Shipping Notice (ASN) accuracy

Many of the above KPIs relate to 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 forging 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 is bound to result in headaches, human error and plenty of time-consuming footwork.

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 reduce human errors such as incorrect data entries or duplicate files.

Investing in vendor management software to mitigate vendor risks, automate payables and assess performance metrics is a great starting point.

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.

Supply Chain Vendor Management

Vendor management is an essential part of your supply chain. Automated vendor management is especially important if your supply chain is complex and widespread.

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.

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 that can make this job a lot easier for both you and your suppliers.

Automated bill payments to your suppliers can 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.

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