No organization is an island! In complex businesses, where service delivery depends on working with a network of third parties, vendor management is essential.
It's no exaggeration to say that relationship with vendors can be crucial to a company's success.
Organizations of any industry may require supplies to create their own products or services, or to support certain functions or activities.
And just like organizations manage their teams, they can (and should) manage their vendors, to ensure the goods and services they need are delivered on time and meet the quality requirements.
So let's explore the concept of vendor management and its main objectives, and see how to make this process as efficient as possible.
Vendor management refers to the processes organizations use to manage their suppliers (also known as vendors). These processes cover a variety of activities, such as choosing vendors, creating and negotiating contracts, managing costs, mitigating or avoiding risks, and ensuring timely delivery.
Vendor management aims to maximize investment, reduce possible disruptions, and achieve business goals.
In simple words, vendor management is about understanding how your vendors work, and managing the relationships with them. It’s also about creating a strategy that would let you get the most out of the interaction with the vendor.
Vendors' work can be handled by managers, vendor managers, or even resource managers who can be responsible for some elements of vendor management, like scheduling contractors.
The types of vendors that organizations use correlate with the industry and needs of each particular organization. These could include marketing consultants, food suppliers, cleaning, or service providers, depending on what support, tools, or resources a business needs to function properly.
Vendor management helps a business control the work of their vendors, setting the rules and keeping track of how things are going on. Here we can discuss four main aspects a business should particularly consider while managing vendors:
Contract negotiation covers the goods and services a vendor will provide the company with: the start and end dates, and all the terms and conditions. Creating a contract is essential for both parties, as it gives them clarity about their rights and responsibilities, and protects them from possible negative situations potentially caused by misunderstandings or abuse.
To ensure that vendors meet the requirements stated in the contract, their performance should be periodically measured and tracked. The key performance indicators could include such things as delivery dates, volume, and quality of goods / services.
Monitoring vendor performance plays two important roles. Firstly, it helps identify areas for improvement and prevent possible problems. Secondly, it lets managers understand vendors’ attitudes to work – how reliable they are, how quickly they respond, and how they support the company’s business goals.
No matter how “technical” your business is, your team consists of people. And this means that there will always be a human factor influencing your work. That’s why establishing a strong and long-lasting relationship with vendors, and trying to improve existing ones, is an essential part of the vendor management process.
Mutual respect will help the buyer and the vendor reach an agreement faster. Besides, the stronger the relationship, the better your chances to negotiate a favorable price.
This process covers three main aspects: risk identification, assessment, and mitigation. There is a wide range of vendor-related risks, such as:
The ability to timely identify the risk and manage it can prevent unpleasant situations like lawsuits or company operations’ disruptions. That, in turn, helps avoid financial and reputational risks, which can negatively affect the future of the business.
Vendors are very important for the company, since the goods and services they provide literally let the organization function properly. If vendors’ work is well-managed, the business gets more opportunities to grow, reaching its goals and getting profit.
Here are the main benefits of effective vendor management:
The access to centralized information about your vendors, their assets and facilities, and close interaction with them gives a business more visibility – and this helps identify hidden costs, and not let the project go over budget, eliminate unnecessary spending, negotiate better rates, or even find cheaper alternatives.
By reviewing your contracts and services/goods, you can get a better understanding what you’re paying for and then, if necessary, reconsider the price or reduce the scope. By asking vendors the right questions and fostering transparent relationships with them, you can not only negotiate the initial price, but also understand the total cost, planning for the good / service entire lifecycle. This way, you can improve your project financial management.
An essential component of vendor management is a risk management strategy – evaluating the risks posed by suppliers or third-party vendors. The better your strategy, the less damage can potentially be done to your business. A good vendor risk management strategy should cover all the stages of interacting with vendors, including on-boarding.
The risks vendors can pose can be of three types:
Luckily, by doing a through vendor history check, outlining clear contract terms and conditions, and closely monitoring vendors’ activity, you can prevent or mitigate risks of any type.
Efficient vendor management helps optimize the buying process, improving reliability, providing a better quality of goods and services, and getting competing prices. Close collaboration and vendors’ performance tracking help streamline all the processes and reach organizational objectives, improving your company's success rate.
An effective vendor management process lets organizations get the goods and services of the best quality. By doing a careful initial assessment, companies will eliminate the possibility of hiring a low-performing vendor. And by measuring vendors’ performance, they can eliminate existing low-performance vendors. This way, companies ensure that the services they get meet the standard.
Further reading: Best Practices for Managing Contingent Workers ➡️
To be effective, vendor management needs to be strategic – in other words, there should be a systematic approach to interacting with your vendors. Here’s a short algorithm of how to manage your vendors successfully:
Analyze how effective the methods you’ve been using are. What are these methods? Are you satisfied with your vendors? Are there any problems that keep popping up? Are there any practices you’d like to continue?
Such an analysis will help you understand where you’re at and what areas of vendor management need improvement.
Based on your research, you can set clear vendor management goals that would let you see in what direction you should be moving. For example, you may want to:
However, these goals are quite general. What you really need is clear KPIs (key performance indicators) that would let you track and measure vendor’s progress. These metrics can include the following:
KPIs help clarify expectations and set a specific standard that would keep everyone on the same page.
A plan is a physical document where you state what actions you’re going to take to make vendor management efficient. The plan is like a guide that would not let you miss anything important and make the management process smooth.
In the plan, you could include the following:
At this stage, you do some research and evaluate potential vendors based on their experience, resources, track record, and other factors, relevant to your goals and KPIs. The more effort you put into selecting a vendor, the higher the chance you will be able to establish a productive and long-lasting relationship.
In the contract, you clarify all the important aspects of collaboration, ensuring they benefit both parties. You could include sections covering your business objectives, the rights and responsibilities of both the buyer and the vendor, non-disclosure of information, client management, and any other things that might affect your collaboration. Discussing all the details and negotiating a good contract takes time, but in the long run, it can save you the trouble.
This part involves gathering and preparing the vendor data and paperwork to set the vendor up as an approved supplier – payment information, insurance, tax forms, licenses etc.
This should be a continuous process. The best way to evaluate vendor performance is by using KPIs that would show you specific figures. By monitoring vendor’s work, you can spot the problems and address them before the situation gets out of control, and ensure the vendor meets the expectations outlined in the contract.
Along with monitoring the vendor performance, you should also monitor the risks that could possibly be caused by the vendor’s actions, like security issues or non-compliance with regulations, or a failure to provide the goods or services.
Ensuring a timely payment will help strengthen your relationship with the vendor – after all, just like you expect the best quality of the goods you get, the vendor expects to be paid on time.
Once you developed a strategy, you can actually implement it at the organizational level. This mainly means communicating the strategy to the rest of the team, especially those team members who would be directly working with the vendor, or whose work will be affected by the vendor.
Here we talk about evaluating you own work as a vendor manager. Are the goals and KPIs you determined good enough? Does the contract cover all the necessary details? Do you need to make any changes to your vendor management plan? You can always improve your strategy if you see the need.
Besides a straightforward contract, clear plan, and goals that determine the course of the vendor management process in your organization and keep you on track, there are other things that would make this process more efficient and that you should consider:
“Communication is the key” – that’s the golden rule that generally applies to any interaction with people, and will apply to buyer-vendor relationship management in particular.
Clear communication with vendors helps you set expectations for both parties, openly discuss problems, find solutions that would work for everyone, and, what’s also very important, establish trust and mutual respect:
As we mentioned above, establishing metrics (KPIs) as a performance standard ensures continuous improvement and helps reduce business risks. Tracking performance by emails and discussions is not effective – it’s subjective and doesn’t provide you with a real picture. For a successful and full review, you need a structure, and this can be achieved by having KPIs.
Seeing your vendors as long-lasting partners and deliberately working on improving your relationship helps receive the best quality goods and services and enjoy a truly productive collaboration.
An effective vendor management process empowers your business, optimizing the relationship with your vendor, helping avoid multiple risks, and creating conditions for success. By approaching your vendors with a thorough system, you facilitate your communication and ensure a smooth experience for both your company and the company providing the service.
