A Guide to Creating a Vendor Management Process

Vendors are one of the key stakeholders behind any successful business. They are an important asset to any organization and add great value to the businesses in accomplishing their goals. But to maximize the value they provide, it is not only important to select the right vendors but the company should have a vendor relationship management system. Not only does it help maximize value but proper vendor management leads to strong and lasting vendor relationships.

You may be associated with a handful to hundreds of vendors or suppliers depending on the business size. The contract and pricing would be different for each vendor. But no matter how many suppliers you work with, a proper vendor management system is a must-have. It will assist you in organizing contract terms, points of contact, financials, and more. Managing them can get daunting at times but careful planning and strategic thinking should help you sail through to make the process more effective.

Today, in this blog post, we will learn what vendor management is, how does it benefit businesses, and how to create a vendor management process.

What is Vendor Management?

Vendor Management is nothing but a company’s internal system to deal with external vendors and suppliers. The system, if well-established to deal with the vendors, plays a vital role in boosting the company’s overall revenue. It is also a form of risk management. Regular auditing and tracking of vendors can save you from poor financial vendor relationships.

A vendor management process can help you achieve the following goals apart from vendor relationship management-

1. Evaluating vendor capabilities that include but is not limited to the quality of goods and services, pricing, and turnaround times.

2. Contract negotiation and management

3. Performance evaluation

4. Transaction Management

5. Due Diligence for Potential Partners

How does Vendor Management benefit businesses?

There is a myriad of benefits of creating an effective vendor management process. Vendors or suppliers are an integral part of your business. They are, in a way, your business partners who are responsible for the economic well-being of the organization. Apart from that, an effective vendor management system also helps streamline certain business activities. So, you need to invest some effort into building a vendor management system that is capable of maximizing the business and creating ever-lasting vendor relationships.

How to create a Vendor Management process?

Each vendor is different in terms of capabilities, reliability, and affordability. This can have a significant impact on your business’s bottom line. Building a process ensures that the bottom line isn’t much impacted and also gives your business a competitive advantage at the same time.

Adhere to the following steps to make a thorough and effective vendor management process-

1. Review your business goals and requirements

For a smooth process and better vendor relationships, you first need to understand what exactly you require from your vendors that help scale up the company value. Once you are clear about your requirements and how that will assist you in achieving your goals, that would make the rest of the job easier. This will help you evaluate the worth of your potential vendors and allow you to set the benchmarks for the right kind of vendor accordingly.

2. Dedicated Vendor Management Team

Have a team that specifically deals with the vendors. Assign them the task of hiring the right vendors and contracts that align with the business’s financial and operational objectives. The team would also be responsible for managing the transactions or enquiries coming from the vendors and suppliers, carrying out due diligence, vendor contract management, and vendor performance reviews. Having a team of that sort ensures that the needs and demands of the vendors are met and the partnership is financially rewarding. The team strength (whether small or large) would primarily depend on your outsourcing power and the number of vendors you have.

3. Have a database of vendors

Create a database of your current vendors and suppliers and categorize them based on the services they provide. This would save you both time and cost, and also allow you to compare performances of two vendors of the same nature. You can also group your vendors based on criticality and essentiality to make your process more efficient and effective. As a general rule of thumb, you can sort your vendors into three groups- Primary, Secondary and Tertiary. The primary ones are single source with high value and low volume, the secondary ones have multiple sources but provide moderate value while the tertiary vendors offer plenty of options but with high volume and low value.

Classifying them would also help you understand their value in the company’s goals. For example, vendors of essential commodities are usually suited for long-term goals while the ones dealing with the supply of goods and services are crucial for short-term goals.

4. Mitigate Risks

Every business or company has some associated risks be it related to finance, security, or technology. To mitigate these risks, you can assign the role of a vendor risk manager to someone in your team that focuses on the associated vendor risks. They would monitor all vendors for the changes that could expose your company to risks and vulnerabilities. Apart from this, you should also have a risk management plan for the three groups of vendors that we mentioned in the above point. Of course, planning for everything isn’t possible but evaluating the potential risks and having a winning risk plan beforehand to tackle them reduces the damage. Make sure to monitor your supply chain at all levels and follow your plans in case a risk occurs.

5. Confidentiality Agreement

In a business-vendor relationship, you would have to share certain information with your vendors that might be confidential or of sensitive nature. Therefore, confidentiality agreements should be made which should clearly state the consequences in case a confidentiality breach occurs. This ensures that the vendors display more responsibility and the company’s sensitive information remains protected. It is also suggested that a secure email address be used for both parties to communicate.

Final Word

While you set up a vendor management system, focus on a few important points for better vendor relationships, such as, focus on building long-term relationships, not employing cheap labor as that may prove catastrophic later, and most importantly, having an effective communication strategy. This would not only strengthen the relationship but also make it mutually beneficial. The company would receive the highest value of their investments, and the vendors would receive good compensation for their services.
We, at Dew, have created vendor management systems for our clients. And if you want to build one too, you can get in touch with our experts.