A Complete Guide to Vendor Management – its Benefits, Challenges, Process & Best Practices
Definition of Vendor Management
Vendor management is the process that empowers an organization to take appropriate measures for controlling cost, reducing potential risks related to vendors, ensuring excellent service deliverability and deriving value from vendors in the long-run.This includes researching about the best suitable vendors, sourcing and obtaining pricing information, gauging the quality of work, managing relationships in case of multiple vendors, evaluating performance by setting organizational standards, and ensuring that the payments are always made on time.
So, that’s where the vendor management system or VMS comes in place.
A vendor management system is an online web-based tool that acts as a single node to manage all vendor related activities in any organization or business while ensuring improved efficiency and long-term growth in a cost-effective manner.
Benefits of Vendor Management
By having proper vendor management in place, an organization can experience the following benefits:
(1) Better Selection
By implementing appropriate vendor management in place, your organization can benefit from a larger selection of vendors, resulting in more choices and ultimately better costs.
Your organization can benefit from a bidding war between vendors while ensuring that you get your money’s worth.
(2) Better Contract Management
In a multi-vendor scenario, lack of vendor management system elevates the issue of managing contracts, documentation and other vital information in your organization.
By implementing a proper VMS in place, your organization can benefit from a centralized view of the current status of all contracts and other useful information which will enable your organization to achieve better decision-making capabilities and save valuable time.
(3) Better Performance Management
An integrated view of the performance of all the vendors can be achieved through the implementation of a vendor management system.
This can give your organization a clear understanding of what is working and what is not! This ultimately leads to improved efficiency, which in turns improves the overall performance of the organization.
(4) Better Vendor Relationship
It is never easy to manage multiple vendors at the same time. While some vendors may prove really fruitful, others may not. But managing relationship among the vendors is the key to successful project completion.
By getting all vendor related information in a single place, you benefit from getting all required information at once and it can influence your decision-making process, thereby simplifying it!
(5) Better Value
Ultimately the goal of a vendor management system is to get the most value for your buck. So, implementation of a vendor management system, when done properly can result in long-term savings as well as improved earnings over a period of time.
Challenges in Vendor Management
Although there are many benefits, some challenges need to be overcome to ensure the smooth functioning of the organization.
There are many challenges that an organization may face if vendor management is not implemented correctly. They are as follows:
(1) Vendor Compliance Risk
Setting standards before dealing with vendors can save you loads of time and money spent. Not all vendors may perform as per your standards. It is important to choose the right vendor from multiple vendors, who meet your organizational standards and criteria while promising excellent performance.
(2) Vendor Reputation Risk
Dealing with multiple vendors is not an easy task. Also, the quality of work has to be gauged upfront before getting into a contract, which makes the process more complicated.
While some vendors may get your task done really well, others can put up with some poor performance and throw all your deadlines in a tizzy. Hence, background checks are a must
before any selection is made. This may provide you with some insights into vital points that you may have missed in the first place.
(3) Lack of Visibility
While it is really important to have a centralized data storage solution for managing vendor data, it also benefits the organization from a centralized view and improved visibility, which can lead to better resource allocation and improved efficiency.
(4) Vendor Data Storage
As your organization grows, it becomes essential to have a vendor data storage solution in place. In the absence of a vendor management system, storing and retrieving data might prove to be really tough, considering the fact that you may be dealing with multiple vendors for multiple projects at the same time.
(5) Vendor Payment Risk
Some vendors may have different payment terms, while some may adhere to industry standard terms. Figuring out the terms and ensuring that the payment is always made on time is one of the major issues, especially while dealing with multiple vendors at the same time.
Vendor Management Process
At this point, we can infer that having effective vendor management is crucial. An organization has to plan and execute a process to guide how they will engage with their vendors at every step.
While it is not possible to have one specific vendor management process that encompasses all enterprises and vendors, we can bring together the basic steps that underlie an organization’s start-to-finish engagement with its vendors:
(1) Identification and Establishment of Business Goals
Before the vendor management process starts, it is crucial to identify and establish business goals that necessitate vendor involvement. This helps in understanding the requirements of every business unit and prevents duplication of efforts and wastage of resources in terms selecting and contracting with vendors. It also helps in the later stages of measuring and evaluating vendor performance as these goals establish appropriate metrics.
(2) Establishment of a Vendor Management Team
After the business goals are recognized, the next step should be the foundation of a dedicated vendor management team. This centralized team should be skilled in identifying business goals and KPIs for vendor management, selecting relevant vendors, negotiating the contracting process, periodically assessing the performance of the vendors and tracking all transactions activities.
This team is crucial as they will act as an intermediary between the business units and the vendors and ensure collaboration between the two.
It will also prevent the engagement of too many stakeholders – When vendor management is decentralized to the business units, it results in a large number of contracts with the same vendor or disparate transactions with multiple vendors. This impedes tracking and evaluation of vendor performance and exposes the organization to vendor risk.
(3) Creation of a Database for all Vendor-related Information
After the business goals are clear and the vendor management team is up and running, the next step should be to build an updated and categorized database of all relevant vendors and vendor-related information.
The benefits of this are manifold –
(i) it will match the needs of the business units to the right vendor. For example, the administration can identify the relevant vendors for office supplies, computer equipment, etc.
(ii) after the categorization of vendors based on their type, cross-vendor comparison will become easier for evaluation
(iii) it will streamline information – scattered, disparate vendor information will be stored in a single location and provide insights into the current stage of the vendors, for example, vendors with contract in place, vendors that require renewals, etc. and
(iv) it will enable effective budgeting – you can easily recognize the long-term, critical vendors and the short-term, tactical vendors and assess the budget assignment accordingly.
(4) Identification of the Selection Criteria for Vendors
Once all vendor-related information is streamlined, updated and categorized, you have to select the criteria based on which all relevant vendors will be chosen.
While cost has been the primary selection criterion for choosing vendors, businesses are increasingly looking at other criteria to determine which vendor would best serve their requirements – after all, lowest cost doesn’t guarantee the highest value. A CIO article1 has recognized non-cost factors that need to be considered to select vendors – financial stability, previous experience in the field of work as the business, industrial recognitions, the procedures followed by the vendor, economies of scale and their legal/regulatory records. It is important to consider all of the aforementioned criteria to have a holistic assessment of the vendors.
For purchases of high value, companies also engage in bidding procedures that involve RFQs, RFIs, and RFPs before choosing the vendor.
(5) Evaluation and Selection of Vendors
At this stage, the vendors need to be evaluated based on the selection criteria and, if applicable, the bidding process.
The submitted proposals need to be thoroughly assessed to understand the pricing structure, scope of work and how the requirements will be met, the terms and conditions, expiry and renewal dates, etc. This will ensure that your organization is deriving the maximum value from the vendor. Look out for hidden savings opportunities!
Assess the internal strengths and weaknesses of the vendors and study how the external opportunities and threats can affect your transaction as well as the vendor management process.
Once you have ensured a complete start-to-finish evaluation process, it’s time to choose your vendor.
(6) Developing Contracts and Finalizing Vendors
Well, now you have the chosen one. It’s time to complete the contracting process and get your vendor(s) onboard.
Typically, the contracting stage is assigned to the legal and finance team and the senior management involved with the vendors. The rest of the business units receive the contract and engage with the vendors after the finalization process. This tends to be sub-optimal in the long run – the business units are the ones finally collaborating with the vendors on a day-to-day basis and have valuable insights on how to maximize the vendors’ operational performance. Hence, all the relevant stakeholders need to be involved, at least in the decision-making process.
Best Practices: Techniques to Improve your Vendor Management Strategy
You have a vendor management process best-suited to your organization, in place. However, vendor management doesn’t just end once the vendors are chosen. There are techniques and
best practices that complement your process and can make your organization’s vendor management even more effective. Let’s take a look:
(1) Convey your expectations clearly
Whilst engaging with vendors, it’s necessary to clearly define the business goals of the organizations and expectations from the vendors. Let the vendors know what your current and future requirements are and how they align with your organization’s objectives. It will enable you and the vendors to be on the same page and ultimately collaborate better, even in the long-run. It helps to set benchmarks, reduces risks related to vendor performance and compliance, and to evaluate the vendors.
(2) Ensure you set deadlines that are achievable and realistic
Given the set of goals and expectations you have, it is important to set deadlines that can be met, realistically, by the vendors. Setting impossible deadlines not only impedes vendor performance and value creation, but it also increases risk and prevents meaningful collaboration.
(3) Collaborate with your vendors to maintain long-term relationships
The word ‘collaboration’ has come up quite a few times, hasn’t it? Well, it is important because simply negotiating with the vendors about pricing and performance leads to the completion of a transaction. But, when you collaborate and involve the vendors in strategizing how to achieve the goals and expectations, it leads to valuable, long-term relationship building. Collaboration allows both the enterprise and the vendors to brainstorm innovative ideas about how value-creation from their partnership can be maximized.
In fact, Zycus’ annual survey, Pulse of Procurement2, has recognized achieving better synergies with suppliers as one of the top priorities and working with suppliers to improve performance as a key focus area for procurement professionals.
(4) Establish KPIs to measure Vendor Performance
How do we realize if the vendors are delivering as per the set expectations and business goals? We need Key Performance Indicators (KPIs) in place to measure the various facets of the vendors and to ultimately know if the vendor management process is effective.
The KPIs vary according to the organizations and based on what they consider as important while evaluating vendor performance.
However, another article by CIO on ‘Vendor Management: How Do You Measure Value for the Money?’3 has categorized various quantitative and qualitative ways to establish KPIs and measure vendor ROI:
* Relationship Management; measured by the vendor’s commitment, flexibility, and innovation,
* Cost Management; measured discounted pricing, order costs, etc.,
* Quality; measure by staff expertise, order accuracy, conformance to requirements, warranties, etc.,
* Delivery; measured by on-time delivery, response time to order issues and emergencies, etc., and
* Customer Satisfaction
(5) Assess Vendor Risks to enable its Minimization
This is probably one of the most important techniques that will help ensure vendor management delivers what is expected.
Risk assessment of vendor management is not a single step – It starts when you recognize a need for a vendor and then, it’s simply ongoing.
There are multiple types of risks surrounding vendor management – financial, payment, operational, compliance and data security to name a few. You need to periodically identify all vendor-related risks at every step of the vendor management process, assess its impact based on your risk appetite and plan mitigation measures.
The threats that pose as risks are continuously changing – ensure that you are monitoring the internal and external environment of the organization and assess the controls you have in place, their effectiveness and update them as required. This level of due diligence will help you minimize vendor-related risks and ensure vendor performance is able to satisfy all requirements.
Food For Thought – Difference between Vendor Management and Vendor Relationship Management
In many scenarios, the terms ‘vendor management’ and ‘vendor relationship management’ are used interchangeably. Does one additional word really create any difference? Well, it does. While vendor management covers the entirety of an enterprise’s engagement with its vendors,
Vendor relationship management is a part of that entirety that focuses on the ‘human aspect’ of vendor management. At the end of the day, the vendors are represented by people and we have already established how valuable vendor relationships are for an organization.
Building lasting and meaningful relationships with vendors, especially the critical ones, is going up on the list of priorities for an organization dealing with vendor management. Teams are recognizing the value of synergizing with their vendors – meaningful, sustained collaboration can positively impact vendor performance and can also help minimize vendor risks. In order to facilitate this, there are a growing number of VRM tools that enable companies to effectively manage their vendor relations.
In a Nutshell
This blog post talks about a very crucial aspect of organizational functioning – vendor management. In today’s global economy, where geographical and economic barriers are constantly diminishing, organizations have to work with different types of vendors from all around the world. Even if you are working with a single vendor, it is crucial to have effective vendor management in place because their performance ultimately affects your business’s performance. It is important to understand the benefits and challenges of vendor management so that you can design an effective process that will guide your engagement with your vendors. Don’t forget to complement your process with vendor management best practices to ensure that your vendors deliver maximum value to your organization.
– Written by Jijnyasa Patowary & Viral Doshi