Big businesses are involved in dealing with multiple suppliers and various vendors to reduce or control their increasing costs. It involves the various business processes that a company goes through while dealing with a number of suppliers. This is done while managing relationships with multiple suppliers or stakeholders who have a beneficial interest in the organisation.
In this blog, the key aspects of vendor management, including how to identify and select the right vendors, how to negotiate contracts and pricing, and how to measure and improve vendor performance will be explored. Key insights and best practices from managing vendors, as well as real-world examples of successful vendor management strategies, are also shared. So whether you're looking to improve your current vendor management processes or are just getting started, this blog is for you.
Did you know? Vendor management is also known as third-party vendor management because it involves managing third-party external stakeholders of the organisation, the suppliers.
Definition of Vendor Management
Vendor management is a set of practices or steps that businesses follow to find the right kind of vendors and ensure the maintenance of long-term mutually beneficial relationships between the organisation and the suppliers to curb the costs incurred by the organisation and to reduce the level of risks associated. It includes various steps such as vendor analysis, sourcing, contract management, review of performance, and other steps that deal with suppliers.
Advantages of Vendor Management
Vendor management helps businesses reduce the risk involved and lower the huge costs incurred by businesses. Managing vendors has its own set of advantages, which are mentioned below:
Selection of Better Vendors
A detailed vendor management plan helps in the selection of the right vendor partner by identifying the needs of the business.
Process is Streamlined
When the detailed responsibilities of both the vendor and the buyer are ascertained, it becomes much easier to ensure a smooth workflow. Delivery compliance and the payment process are managed very easily, leading to predictable outcomes and a much more effective procure-to-pay process.
Efficient Vendor Onboarding
Bringing on new vendors for the organisation and expecting them to speed up might take a lot of time and resources. Vendor management systems enable new vendors to operate faster by following a predetermined path.
Reduction in Risk of Disruption of Supply Chain
A vendor management system gives the organisation better control over the supply chain, eliminating any risk of disruptions. Handling vendor relationships allow an organisation to handle all kinds of vendor problems.
Reduced Costs and Better Vendor Rates
The establishment of strong vendor relationships between the organization and the vendors resulting from vendor management provides organizations with better rates and more lucrative deals. This helps cut costs and improve vendor rates.
Better Relationship with the Vendors
Effective management of suppliers helps an organisation to strengthen the loyalty of suppliers and encourage them to improve the quality of products and services provided by them.
Steps and Processes Involved in Managing Vendors
The vendor management process consists of seven crucial steps, which are as follows:
Assessing the Vendor
Before bringing any merchant or vendor, an organisation needs to assess the quality of the products or services provided by the merchants and the vendors, the pricing of the products, their network in the industry, reliability and the amount of time taken to supply the goods. Some organisation use scorecards to examine their vendors, which involve giving points based on quality, pricing and time of supply of goods.
Establishment of Goals
An organisation needs to clear its objectives with its vendors to meet its long-term sales goals. Comprehending the business process in detail with the vendors will help the organisation to build a level of mutual understanding and a positive business relationship with their vendors. With valuable strategic inputs, vendors will be able to ascertain the needs of the organisation and ensure there is sufficient stock maintained in the inventory from time to time.
Negotiating a Contract
To ensure a sound business relationship with vendors, it is important to ascertain and acknowledge their business objectives. To ensure that this happens, draft a contract that is both beneficial for the organisation and the vendors. It is also imperative for an organisation not to negotiate too much in respect of prices and profit margins. This could lead to a deterioration in the quality of products provided by vendors. To avoid this, the terms of the contract should be well planned which is profitable for both parties involved.
Onboarding the Vendor
When there is a mutual agreement between the organisation and the vendors involved, the contract is signed and the vendor comes on board. The process of onboarding involves guiding the vendor into the company’s business network. A sound onboarding process ensures the start of a sound business relationship.
Monitoring the Performance of Vendor
When the organisation sets expectations, the vendors are expected to meet the standards adopted in the contract, but in many cases, the vendors might not meet those expectations. The company will be required to constantly monitor vendors to ensure that they work with the highest efficiency. Those vendors who perform exceedingly well are considered strategic vendors. The opinion of these strategic vendors is considered significant during the establishment of new policies for vendors.
Regular Communication with the Vendors
Significant delays occurring in the re-stocking of goods are a cause of concern for every organisation, and in order to tackle this situation and improve the time taken in the re-stocking of goods, the organisation should establish a smooth communication system with the vendors or suppliers. Many organisations in various industries hold various gatherings or conduct forums with vendors to talk about relevant issues such as re-stocking, supply networks and much more. Vendors, through these gatherings and forums organised by the company, get guidance and tips to improve their work.
Rewarding the Vendors
Vendors consider themselves an invaluable part of the organisation. Hence, when a company rewards them for their exceptional performance, they are much more motivated. This helps in bringing healthy competition among the vendors, which would lead to improvement in the level of performance provided by the vendors.
Challenges Faced in Managing Vendors
There are several challenges faced by an organisation while managing vendors, which are as follows:
- For companies that have a large base of suppliers, it could be increasingly difficult for them to get a centralised view of the vendors of the organisation. While working with a large number of vendors, it becomes increasingly challenging to organise and manage them without the help of certain tools.
- Challenges can arise at different stages in an organisation. It can be a challenge to standardize the entire vendor onboarding process.
- Heavy reliance on certain vendors due to strong company-vendor relationships could lead to the possibility of overreliance on a supplier. Losing such a heavily reliant vendor could lead to disruptions in the business operations of the organisation unless the company has a well-structured detailed backup plan ready in case of contingencies.
- Under the system of vendor management, the data of employees of the organisation dealing with vendors and external suppliers should be updated as per the prevalent requirements. Updating vendor data will facilitate smooth workflow and strengthen the relationships between the company and its vendors.
This was all about the definition of a vendor, what is meant by vendor management and its distinctive advantages. It also covered the steps or processes involved in managing vendors and the challenges faced while managing vendors. We hope that with the help of the information shared in this blog, readers will be able to ascertain the true meaning of vendor management and its various other constituents involved.