Vendors play a critical role in the success of an organization. Keeping the supply chain healthy should always be a priority for high-performance organizations. Organizations often have to deal with multiple vendors simultaneously to ensure seamless operations and achieve their business goals. Since supply chain disruptions can bring operations to a standstill, businesses need a solid process to deal with their vendors. This is where vendor management comes in.
In this blog, we will explore the different aspects of vendor management and how you can leverage the process to ensure effective management of your supply chain.
What is vendor management?
Vendor management refers to the processes used by organizations to manage their vendors. This involves various activities like vendor selection, contract negotiation, cost management, service delivery, etc. The whole process aims to create the best vendor management practices to benefit the organization.
Organizations can bring down supplier costs, improve service delivery and mitigate potential risks with proper vendor management. Most importantly, vendor management plays a critical role in meeting business objectives and preventing disruptions that may arise from delivery failures.
What is the difference between procurement and vendor management?
Procurement is all about finding the best deals for an organization and mitigating contractual risks. Procurement people typically scan the market for better opportunities and focus on negotiating lower fixed rates. They also work with new vendors to reduce the overall cost as much as possible.
On the other hand, vendor management focuses on developing relationships with third-party vendors and mitigating risks. When you maintain healthy relationships with your suppliers, you can enjoy flexibility while reducing costs and fostering innovation.
In the bigger picture, both procurement and vendor management focus on securing the organization’s interests. The key difference lies in how they go about it.
What is the role of vendor management?
Many tasks go into vendor management, including controlling costs, negotiating contracts, maintaining relationships with partners, creating procurement standards and sourcing the best vendors. Here is a list of roles and responsibilities in an organization’s vendor management process.
- Developing vendor management policies and procedures
- Working with third-party vendors on a day-to-day basis
- Monitoring the performance of vendors and conducting due diligence
- Identifying the risks associated with vendors following contract execution.
- Communicating with the different business units and departments
- Reporting to senior leadership about the vendor management process
Why is vendor management important?
Vendor management plays a critical role in the success of a company. Businesses need to get the best value for their money if they wish to outperform their competitors in the market. Taking a strategic approach to procurement through vendor management will help manage your suppliers efficiently and bring myriad other benefits.
With effective vendor management, you can mitigate risks, optimize performance, create loyal relationships, boost efficiencies and more. In the long run, it can bring significant value to your brand and prevent any damages arising from your vendor’s actions.
What is the vendor management process?
The vendor management process can be broken down into six key strategies. Each strategy plays a distinct role in solidifying a buyer’s relationship with vendors. Here’s an overview of the six strategies involved.
1. Establish objectives and vendor criteria
The first step in the process is establishing business objectives and determining the criteria for choosing vendors. This stage mainly focuses on aligning the roles of vendors and buyers. Vendors who have a clear knowledge of your business objectives can serve you better and ensure a seamless inventory flow.
2. Vendor selection
Once you have established your business goals, you can choose the right vendors who can meet your expectations. You must research a list of vendors in the market and sort them out based on their experience, size, commitment to quality, etc. Once you have narrowed it down to the last few vendors, you can request quotations or proposals. Price should be a strong factor in vendor selection, but it should not be the only one. Make sure you choose the right vendors based on their track record, capacity to fulfill your requirements and communication.
3. Contract negotiation
After vendor selection, you must negotiate the contract to keep all the terms mutually beneficial. This is also the stage where you establish KPIs for various vendor activities. Understanding a vendor’s business process is essential to ensure proper contract negotiation.
4. Vendor onboarding
In this stage, you must establish the chosen vendor as your supplier. This involves onboarding them on all important things, including how they will get paid, who must be contacted during emergencies, software license details, tax details and insurance details.
5. Vendor monitoring and risk management
When you allow third-party vendors to access your resources, it exposes your organization to certain risks. You must monitor your vendors for various risks, such as compliance breaches, data security threats and intellectual property loss. You must also monitor your vendors for potential risks arising from the non-delivery of products or services that might disrupt your company’s operations.
6. Vendor performance management
To get the most out of your vendors, you must monitor their performance regularly. You must match their actual performance with the KPIs established in the contract. By regularly checking quality and performance, you can build strong strategic relationships with your vendors and leverage them for long-term business gains.
What is a vendor management policy?
Most organizations know their internal risks and take steps to mitigate them. However, they’re often in the dark about the risks arising from external vendors. Your vendors have direct access to some of your mission-critical information. This can significantly increase your exposure to cyberthreats.
Organizations create vendor management policies to identify the risks arising from external vendors. When you know what is at stake, you can implement better controls to mitigate these vendor-related risks. Most importantly, a vendor management policy can also be critical to ensuring compliance.
What should be in a vendor management policy?
To create a vendor management policy, you must list all the vendors in your organization. Ensure you include all third-party suppliers, contractors and associates who are in business with your organization.
Once you have the list of vendors, you need to identify the ones with access to sensitive information in your organization. These vendors must be categorized as critical and monitored with extra care. If these vendors get compromised, it could easily lead to a data breach in your organization and damage your reputation.
What are the benefits of vendor management?
A well-developed vendor management program can bring many significant benefits to an organization from compliance adherence to cost reduction. Some of the key benefits are as follows.
- Improved selection: With proper vendor management, you can choose from a large selection of vendors and get the best offers in the market. You can also have an organized way to promote bidding among multiple vendors and pick the best pricing.
- Better purchasing power: When you have picked the right vendors with the best offers in the market, you can boost your purchasing power by consolidating your volumes.
- Risk mitigation and management: A key benefit of vendor management lies in mitigating risks arising from third-party sources. Once you identify your critical vendors, you can design processes suitable for them to ensure low risk.
- Enhanced performance: Once you clearly understand what to expect from your vendors, you can understand what is working and what is not. This leads to better efficiency in your operations, and you can boost your overall performance.
- Better negotiation strategies: With vendor management, you can develop a strong negotiation strategy in your organization. Strong negotiation helps you win better offers. You can improve all aspects of your negotiation and develop standard procedures for negotiating with new vendors.
- Strengthened relationships: Vendor relationships are highly critical if you wish to have a seamless supply in your organization. You can achieve this by incorporating a solid vendor management program.
What are the challenges in vendor management?
External vendors can help you achieve your strategic objectives by handling complex processes that cannot be done internally. However, vendor management is not without its challenges. Consider these challenges before establishing a vendor management process in your organization.
- Compliance risks: Not all vendors adhere to the compliance regulations set by data privacy laws. In most cases, a lack of compliance from their end could also expose you to compliance risks and penalties. You must choose vendors who meet your compliance standards while also delivering great performance.
- Data security and other threats: When your vendors have easy access to your sensitive information, it makes you vulnerable to data breaches and other security risks. Risk planning is essential if you wish to minimize the risks caused by vendors.
- Administrative costs: Having the proper process for choosing and managing the right vendors comes with a price. When you manage multiple vendors, you are likely to incur overheads related to project management, vendor support and more. It is always better to check your ROI and ensure the vendor management savings offset the costs.
- Lack of visibility: Managing multiple vendors often generates enormous volumes of data. Organizations often do not have a centralized data management solution with complete visibility. You need a robust documentation management solution to improve documentation efficiency and visibility.
Enhance vendor management with IT Glue
IT Glue is a powerful documentation solution that allows you to easily manage your vendor relationships alongside the hardware and software assets that you manage. By leveraging out-of-the-box templates, you can document your vendor information, including name, type, category, importance, risk level, etc. This helps you better understand your vendor relationship with the rest of your IT and gain the most out of it.
The vendor information you store in IT Glue is highly secure. IT Glue also comes with SSO, IP access control, host-proof hosting, MFA, audit trails and more, all within a SOC 2 Type II compliant solution.
To learn more about how IT Glue can help you with vendor management, request a demo!