What is Vendor Management: Meaning, Process, Examples, Best Practices, Benefits

Vendor management or Supplier Management is crucial for businesses looking to scale or upgrade their operations even as the global supply chain faces challenges. It also ensures that your relationships with the vendors are transparent and that you build long-term strategic partnerships that benefit all parties. 

Continue reading to understand the meaning of supplier management or vendor management systems, processes, and tools.

What is the Vendor Management Process? 

Vendor management or supplier management is managing and communicating with suppliers (vendors) to prevent third-party disruptions. It includes the following activities: 

• Selecting vendors
• Onboarding vendors
• Negotiating contracts
• Training them to use your platform
• Controlling costs
• Reducing vendor-related risks
• Ensuring delivery
• Evaluating performance

These activities ensure suppliers or vendors work perfectly and in tandem with your organisational goals. 

Unlike most business processes, vendor management can’t occur in silos. It is a coordinated effort between the following operational areas: 

• Procurement management
• Contract management
• Third-party risk management

Importance of Vendor Management 

Vendor management or supplier management ensures distribution-free business processes, but to what extent? Let’s find out: 

• It improves the communication and coordination between a firm and its vendors. This could improve vendor service quality, better pricing, and timely delivery. 
• It also ensures that your vendors meet your quality, safety, and legal requirements standards. 
• A robust vendor management system would monitor the risk involved in vendor management and help you mitigate any risks. 
• It can also help you optimise the costs and benefits of working with vendors by helping you negotiate better manage payments and early payment discounts.

Why do businesses need an effective vendor management process? 

An effective vendor management process or supplier management process helps you stay on the path. It provides a framework you can use to manage new and old vendors. 

An effective vendor management process can help you

• Select the best vendors for your business and ensure they perform well
• Increase cost savings by helping you negotiate better rates
• Speed up the vendor onboarding process
• Identify potential risks in the supply chain and mitigate them
• Help build strong relationships with vendors, leading to better rates and service

What is the contract period in vendor management?

The contract period in vendor management or supplier management varies depending on your industry, legal and regulatory requirements, and the business’s internal policies. 

Retaining vendors for the long term is generally recommended since identifying, selecting, and onboarding new vendors can be expensive if done over the short term. 

Stages of Vendor Management

Contrary to what you might think, the vendor management process or supplier management process starts before you onboard the vendor, not after it. And it typically never ends since a robust process will go and help you optimise contracts using data. 

The vendor management or supplier management process can be broadly divided into four stages: 

1. Establishing business objectives
2. Selecting vendors
3. Onboarding vendors
4. Tracking and analysing vendor performance

Let’s discuss these stages and their steps in detail. 

Establishing Objectives

Every vendor management strategy needs SMART goals — specific, measurable, achievable, relevant, and time-bound to align with overall business goals. Establishing and communicating goals helps businesses reap maximum value from vendor relationships. 

Selecting Vendors

Setting objectives also helps you identify the right vendors. Once you know the end goal, you will identify and choose the vendors accordingly. Before selecting a vendor, ask yourself the following questions: 

• What is their financial history, relationship with their stakeholders, and credit scores?
• What is their total annual spending and delivery rates?
• How quickly can the vendor deliver?
• What quality protocols do they follow? Can they certify that? 
• Do they comply with Environmental, Social, and Governance (ESG) requirements? 

Based on your answers, forge a long-term strategic relationship with them. Involve them in processes and decision-making meetings so they can offer insights into the supply chain and help you make informed decisions. 

Onboarding Vendors

Now is the time to finalise the contract and begin onboarding. You must create contracts and agreements specifying terms and conditions, responsibilities, deliverables, outcomes, key metrics, payment terms, and dispute resolution mechanisms. 

Figure out your chosen vendor’s business model to understand how the deal can benefit all parties involved. 

Once you sign the deal, get all the essential information from the vendor and store it on your vendor management tool. An automated system ensures that vendors have a seamless onboarding experience and delegate input to vendors. Plus, it would minimise paperwork and save time for your internal teams. 

You also need to manage risk strategically. You could use risk assessments, audits, policies, and procedures to ensure vendors adhere to them. 

Tracking and analysing vendor performance

You want to define a set of metrics to track and measure vendor performance to ensure the deal is beneficial. You could track metrics such as the following:

• Quality
• Call answer time
• Order completion time
• Shipping time
• Advance shipping notice (ASN) accuracy
• Compliance
• Service quality

A vendor management tool can again be helpful in this case. It can help you

• Define and track key metrics.
• Provide dashboards to visualise data in real-time and identify trends that require attention.
• Alerts vendors when quality falls below a certain threshold or when delivery dates are due.
• Identify patterns using advanced analytics capabilities and analysing vendor data and help you make informed decisions. 

These steps can help you build a softer relationship with vendors and foster trust. Communicate with them openly and honestly, resolve any disputes amicably, and share your best practices frequently.

Challenges of Vendor Management 

No matter how detailed or effective the vendor management process or supplier management process is, it has challenges. Following are some of the challenges you can face:

• Vendor management gives you a centralised view of all your vendors by organising the data in a central location accessible by all. 
• Your vendors could fail to comply with legal, regulatory, and ethical standards. This could lead to fines and even lawsuits.
• Consistent experience with vendors across industries and sectors can become redundant and ineffective; aim to keep the experience personalised yet simplified. 
• The risk of heavily relying on one vendor while ignoring the other could disrupt your relationship.
• Establishing roles and responsibilities for every vendor and maintaining open and honest communication. 
• The manual vendor management process also makes tracking and analysing vendor performance and related data difficult. 
• Optimising vendor spending while maintaining their high-quality services is a big challenge. 
• Having inaccurate and outdated information about your vendors could make your management process unnecessarily complicated. 

Benefits of Automating Vendor Management 

If you’ve been in the business long, you must have experienced the challenges mentioned earlier first-hand. Automating the vendor management process can help you deal with them. It can: 

• Help businesses identify, vet, manage, onboard, and invoice vendors. 
• Stay compliant by automating the compliance checks and ensuring your vendors meet those standards. 
• Integrate your vendors within your business processes to ensure seamless communication. 
• Decrease the costs by reducing manual labour and human errors and streamlining complex workflows. 
• Improve transparency and communication by giving real-time visibility into their metrics and, therefore, their performance. 

Best Practices in Vendor Management 

Here are some tips to ensure your vendor management strategy pans out: 

• Communicate your policies and processes to the vendors upfront.
• Automate the vendor management process to minimise the room for human errors. 
• Define tasks and ownership of those tasks upfront to avoid room for misunderstandings. 
• Define your metrics for success and redefine them per the changing external and internal environmental conditions. 

Vendor Risk Management Program

A vendor risk management program evaluates the risk a vendor poses to the business before and after a relationship is established (for the duration of the contract). The program involves a life cycle management process and offboarding. 

It helps an organisation identify, analyse, monitor, and mitigate risks. It ensures the business does not fall prey to financial or reputational damage, external disruptions, and legal liabilities. 

It involves assessing the following major types of risks: 

• Legal Risk: Involves the legal consequences you could face due to non-compliance. 
• Reputational Risk: Involves the risk you could run into by engaging with a particular vendor; it could have a negative image for your business in the media. 
• Financial Risk: Involves losing money or value due to operational failures, liquidity shortage, or credit default. 
• Cyber Risk: Involves the risk of data breaches and cyber attacks that could compromise the integrity and confidentiality of the business.