What is vendor management?

Vendor management is a term that describes the processes organizations use to manage their suppliers, who are also known as vendors. Vendor management includes activities such as selecting vendors, negotiating contracts, controlling costs, reducing vendor-related risks and ensuring service delivery.

The vendors used by a company will vary considerably depending on the nature of the organization, and could include companies as diverse as seafood suppliers, IT vendors, cleaners and marketing consultants. Vendors can also range in size from sole traders to large organizations.

Why is vendor management important?

Vendor management is important for a number of reasons. For one thing, vendor management plays a key role when it comes to selecting the right vendor for a particular business need. In addition, companies can use vendor management to achieve business goals, such as harnessing opportunities for cost savings, as well as taking steps to speed up the onboarding process.

Vendors also need to be managed effectively in order to reduce the risk of supply chain disruption and ensure the goods and services provided are delivered on time and to the expected standard. Beyond this, an effective vendor management process can help companies build stronger relationships with their vendors which may, in turn, lead to opportunities to negotiate better rates.

Vendor management benefits

• Improve vendor selection
• Harness cost savings
• Speed up vendor onboarding
• Reduce the risk of supply chain disruption
• Strengthen supplier relationships
• Negotiate better rates

Vendor management process

The vendor management process includes a number of different activities, such as:

• Selecting vendors. The vendor selection process includes researching and sourcing suitable vendors and seeking quotes via requests for quotation (RFQs) and requests for proposal (RFPs), as well as shortlisting and selecting vendors. While price will inevitably be a consideration during the selection process, companies will also need to evaluate other factors when deciding which vendors to appoint for a particular contract, such as a vendor’s reputation, capacity and track record, as well as the vendor’s ability to communicate effectively.
• Contract negotiation. It’s important to get the contract right at the outset and to ensure the terms agreed benefit both parties. Negotiating a contract can take time, and the process will include defining the goods or services that will be included, the start and end dates of the arrangements and all essential terms and conditions. Attention may also need to be paid to areas such as confidentiality and non-compete clauses.
• Vendor onboarding. This will involve gathering the documentation and information needed to set the vendor up as an approved supplier to the company and ensure that the vendor can be paid for the goods or services they provide. As well as essential contact and payment information, the onboarding process may also include information such as relevant licenses held by the vendor, as well as tax forms and insurance details.
• Monitoring vendor performance. As part of the vendor management process, companies will monitor and evaluate the performance of their vendors. This may include evaluating their performance against key performance indicators (KPIs) such as quality and volume of goods or delivery dates.
• Monitoring and managing risk. Vendors should be monitored for risks that could impact the company, such as the risk of compliance breaches, lawsuits, data security issues and loss of intellectual property. Companies will also need to monitor the risk that a vendor’s actions or a failure to provide goods and services as agreed may result in disruption to the company’s operations.
• Payment. Ensuring vendors are paid on time for the goods and services they provide, in line with the agreed terms.

As well as the vendor management process, the term ‘vendor management’ may also refer to online tools which keep all vendor information and related activities in one place for the organization’s reference. Vendor management or supplier management software can fulfil a number of functions, from managing the RFP process to streamlining supplier communications.

Vendor management challenges

For companies with a large supplier base, and/or a complex geographical footprint, it can be difficult to gain a centralized view of the vendors used by a company. Challenges can arise throughout the different stages of the vendor management process, from getting the right documentation from vendors to carrying out any necessary risk assessments. It’s therefore important to adopt suitable processes and tools to avoid any issues.

Companies may use a vendor management strategy to ensure vendor relationships deliver the intended value, with efficient processes. A strategy may include areas such as setting out clear and quantifiable goals, tracking supplier KPIs and building and maintaining effective relationships with vendors. Companies may also classify their suppliers in order to identify their strategic vendors and invest in strengthening those relationships. Other considerations may include taking steps to avoid relying too heavily on a particular vendor.

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