VENDOR MANAGEMENT

Vendor management is the process that empowers an organization to take appropriate

measures for controlling cost, reducing potential risks related to vendors, ensuring excellent
service deliverability and deriving value from vendors in the long-run. This includes
researching about the best suitable vendors, sourcing and obtaining pricing information,
gauging the quality of work, managing relationships in case of multiple vendors, evaluating
performance by setting organizational standards, and ensuring that the payments are always
made on time.

Vendor Management Process

Having an effective vendor management is crucial. An organization has to plan and execute a
process to guide how they will engage with their vendors at every step.

While it is not possible to have one specific vendor management process that encompasses all
enterprises and vendors, we can bring together the basic steps that underlie an organization’s
start-to-finish engagement with its vendors:

(1) Identification and Establishment of Business Goals

Before the vendor management process starts, it is crucial to identify and establish business
goals that necessitate vendor involvement. This helps in understanding the requirements of
every business unit and prevents duplication of efforts and wastage of resources in terms
selecting and contracting with vendors. It also helps in the later stages of measuring and
evaluating vendor performance as these goals establish appropriate metrics.
(2) Establishment of a Vendor Management Team

After the business goals are recognized, the next step should be the foundation of a dedicated
vendor management team. This centralized team should be skilled in identifying business
goals and KPIs for vendor management, selecting relevant vendors, negotiating the
contracting process, periodically assessing the performance of the vendors and tracking all
transactions activities.

This team is crucial as they will act as an intermediary between the business units and the
vendors and ensure collaboration between the two.

It will also prevent the engagement of too many stakeholders – When vendor management is
decentralized to the business units, it results in a large number of contracts with the same
vendor or disparate transactions with multiple vendors. This impedes tracking and evaluation
of vendor performance and exposes the organization to vendor risk.

(3) Creation of a Database for all Vendor-related Information

After the business goals are clear and the vendor management team is up and running, the
next step should be to build an updated and categorized database of all relevant vendors and
vendor-related information.

The benefits of this are manifold –

(i) It will match the needs of the business units to the right vendor. For example, the
administration can identify the relevant vendors for office supplies, computer equipment, etc.

(ii) After the categorization of vendors based on their type, cross-vendor comparison will
become easier for evaluation

(iii) It will streamline information – scattered, disparate vendor information will be stored in
a single location and provide insights into the current stage of the vendors, for example,
vendors with contract in place, vendors that require renewals, etc. and

(iv) It will enable effective budgeting – you can easily recognize the long-term, critical
vendors and the short-term, tactical vendors and assess the budget assignment accordingly.
(4) Identification of the Selection Criteria for Vendors

Once all vendor-related information is streamlined, updated and categorized, you have to
select the criteria based on which all relevant vendors will be chosen.

While cost has been the primary selection criterion for choosing vendors, businesses are
increasingly looking at other criteria to determine which vendor would best serve their
requirements – after all, lowest cost doesn’t guarantee the highest value. A CIO article1 has
recognized non-cost factors that need to be considered to select vendors – financial stability,
previous experience in the field of work as the business, industrial recognitions, the
procedures followed by the vendor, economies of scale and their legal/regulatory records. It
is important to consider all of the aforementioned criteria to have a holistic assessment of the
vendors.

For purchases of high value, companies also engage in bidding procedures that involve
RFQs, RFIs, and RFPs before choosing the vendor.

(5) Evaluation and Selection of Vendors

At this stage, the vendors need to be evaluated based on the selection criteria and, if
applicable, the bidding process.

The submitted proposals need to be thoroughly assessed to understand the pricing structure,
scope of work and how the requirements will be met, the terms and conditions, expiry and
renewal dates, etc. This will ensure that your organization is deriving the maximum value
from the vendor. Look out for hidden savings opportunities!

Assess the internal strengths and weaknesses of the vendors and study how the external
opportunities and threats can affect your transaction as well as the vendor management
process.

Once you have ensured a complete start-to-finish evaluation process, it’s time to choose your
vendor.

(6) Developing Contracts and Finalizing Vendors

Well, now you have the chosen one. It’s time to complete the contracting process and get
your vendor(s) on board.

Typically, the contracting stage is assigned to the legal and finance team and the senior
management involved with the vendors. The rest of the business units receive the contract
and engage with the vendors after the finalization process. This tends to be sub-optimal in the
long run – the business units are the ones finally collaborating with the vendors on a day-to-
day basis and have valuable insights on how to maximize the vendors’ operational
performance. Hence, all the relevant stakeholders need to be involved, at least in the
decision-making process.

Vendor management process flow

The vendor management ‘process flow’ refers to the steps involved in creating an effective
relationship with suppliers. Here are the four steps involved in a vendor management process
flow:
Step 1: Segmentation

Getting the segmentation right is an essential part of the vendor management process. At this
stage, you classify vendors based on a number of metrics like risk, profitability, total spend,
the volume of transactions, quality of products, performance, and more

Step 2: Collaboration

Traditional vendor management practices focus on price negotiation. To unlock more value
from a relationship, buyers need to broaden their focus. By working together with their
suppliers, businesses can take costs and risks out of the bottom line while driving value and
innovation to the top.

Step 3: Implementation
Organizations can execute their vendor management process efficiently by tapping into
supplier capabilities to create mutual value. Buyers and suppliers can engage in activities like
cost optimization, quality management, relationship building, innovation, and risk
management.

Step 4: Evaluation
The final stage of the vendor management process flow is about measuring performance to
check whether you have bet on the right horses. Use your development plan to check your
progress with the set targets. Discuss with your vendor’s improvement actions or plans to
meet evolving needs.

Core vendor management features every procurement solution must have

To be as beneficial as possible, your vendor management solution should include these
features:

1. Visual workflow creator

A good vendor management application will offer an easy-to-use interface to develop and
visualize each supplier relationship. Even business users who don’t have coding expertise
should be able to create and navigate a workflow easily.
2. Drag-and-drop form builder
You can’t do vendor management without forms. Users need the ability to build powerful
online forms quickly with intuitive tools like a drag-and-drop form builder. The form builder
must offer an exhaustive range of fields and a good collection of predefined form templates
that users can choose from.

3. Cloud technology
A cloud-based vendor management application gives buyers the ability to access their vendor
management process from anywhere at any time. With guaranteed uptime and a centralized
database, a vendor management process will be more efficient and streamlined when it lives
in the cloud.

4. Seamless integration
Your supplier relationship management software won’t work in a vacuum. It needs to interact
seamlessly with the other procurement tools that are used by your business. Take a look at
what systems your software needs to connect with, and then pick a compatible solution.
Consider a vendor management application that’s already part of a unified procurement suite

5. Security
Despite the undeniable benefits of the cloud, many businesses hesitate to fully embrace cloud
technology due to security concerns. However, cloud-based vendor management software
mitigates risk with features like conditional visibility, role-based access, and more.

6. Analytics and reporting

Vendor management applications need powerful reporting features that help organizations
stay on top of their operational metrics. Users ought to be able to retrieve the desired
analytical insights on vendor performance, quality, and more whenever they want, with very
little effort.

Benefits of Vendor Management

By having proper vendor management in place, an organization can experience the following
benefits:

(1) Better Selection

By implementing appropriate vendor management in place, your organization can benefit
from a larger selection of vendors, resulting in more choices and ultimately better costs.

Your organization can benefit from a bidding war between vendors while ensuring that you
get your money’s worth.

(2) Better Contract Management

In a multi-vendor scenario, lack of vendor management system elevates the issue of

managing contracts, documentation and other vital information in your organization.

By implementing a proper VMS in place, your organization can benefit from a centralized
view of the current status of all contracts and other useful information which will enable your
organization to achieve better decision-making capabilities and save valuable time.

(3) Better Performance Management

An integrated view of the performance of all the vendors can be achieved through the
implementation of a vendor management system.

This can give your organization a clear understanding of what is working and what is not!
This ultimately leads to improved efficiency, which in turns improves the overall
performance of the organization.

(4) Better Vendor Relationship

It is never easy to manage multiple vendors at the same time. While some vendors may prove
really fruitful, others may not. But managing relationship among the vendors is the key to
successful project completion.

By getting all vendor related information in a single place, you benefit from getting all
required information at once and it can influence your decision-making process, thereby
simplifying it!

(5) Better Value

Ultimately the goal of a vendor management system is to get the most value for your buck.
So, implementation of a vendor management system, when done properly can result in long-
term savings as well as improved earnings over a period of time.

Challenges in Vendor Management

Although there are many benefits, some challenges need to be overcome to ensure the smooth
functioning of the organization.

There are many challenges that an organization may face if vendor management is not
implemented correctly. They are as follows:

(1) Vendor Compliance Risk

Setting standards before dealing with vendors can save you loads of time and money spent.
Not all vendors may perform as per your standards. It is important to choose the right vendor
from multiple vendors, who meet your organizational standards and criteria while promising
excellent performance.

(2) Vendor Reputation Risk

Dealing with multiple vendors is not an easy task. Also, the quality of work has to be gauged
upfront before getting into a contract, which makes the process more complicated.

While some vendors may get your task done really well, others can put up with some poor
performance and throw all your deadlines in a tizzy. Hence, background checks are a must
before any selection is made. This may provide you with some insights into vital points that
you may have missed in the first place.

(3) Lack of Visibility

While it is really important to have a centralized data storage solution for managing vendor
data, it also benefits the organization from a centralized view and improved visibility, which
can lead to better resource allocation and improved efficiency.

(4) Vendor Data Storage

As your organization grows, it becomes essential to have a vendor data storage solution in
place. In the absence of a vendor management system, storing and retrieving data might
prove to be really tough, considering the fact that you may be dealing with multiple vendors
for multiple projects at the same time.

(5) Vendor Payment Risk

Some vendors may have different payment terms, while some may adhere to industry
standard terms. Figuring out the terms and ensuring that the payment is always made on time
is one of the major issues, especially while dealing with multiple vendors at the same time.

Best Practices: Techniques to Improve your Vendor Management Strategy

You have a vendor management process best-suited to your organization, in place. However,
vendor management doesn’t just end once the vendors are chosen. There are techniques and

best practices that complement your process and can make your organization’s vendor
management even more effective. Let’s take a look:

(1) Convey your expectations clearly

Whilst engaging with vendors, it’s necessary to clearly define the business goals of the
organizations and expectations from the vendors. Let the vendors know what your current
and future requirements are and how they align with your organization’s objectives. It will
enable you and the vendors to be on the same page and ultimately collaborate better, even in
the long-run. It helps to set benchmarks, reduces risks related to vendor performance and
compliance, and to evaluate the vendors.

(2) Ensure you set deadlines that are achievable and realistic

Given the set of goals and expectations you have, it is important to set deadlines that can be
met, realistically, by the vendors. Setting impossible deadlines not only impedes vendor
performance and value creation, but it also increases risk and prevents meaningful
collaboration.

(3) Collaborate with your vendors to maintain long-term relationships

The word ‘collaboration’ has come up quite a few times, hasn’t it? Well, it is important
because simply negotiating with the vendors about pricing and performance leads to the
completion of a transaction. But, when you collaborate and involve the vendors in
strategizing how to achieve the goals and expectations, it leads to valuable, long-term
relationship building. Collaboration allows both the enterprise and the vendors to brainstorm
innovative ideas about how value-creation from their partnership can be maximized.

(4) Establish KPIs to measure Vendor Performance

How do we realize if the vendors are delivering as per the set expectations and business
goals? We need Key Performance Indicators (KPIs) in place to measure the various facets of
the vendors and to ultimately know if the vendor management process is effective.

The KPIs vary according to the organizations and based on what they consider as important
while evaluating vendor performance. It includes –

* Relationship Management; measured by the vendor’s commitment, flexibility, and

innovation,

* Cost Management; measured discounted pricing, order costs, etc.,

* Quality; measure by staff expertise, order accuracy, conformance to requirements,

warranties, etc.,

* Delivery; measured by on-time delivery, response time to order issues and emergencies,
etc.,

* Customer Satisfaction.

Tips to Effectively vendor management  

1. Choose Wisely

If you have the luxury of choosing between multiple suppliers, take the time to examine each
one’s pros and cons. Determine which one can give you what you need, when you need it and
for the right price. Evaluate everything from their response time to their contract terms to
their costs. Relationships are most successful if they have the time to grow, so you want to
select a supplier that you and your organization will be able to grow with.

2. Communicate

The easiest way to engender ill will in any relationship is a lack of communication. Take the
time to communicate with your suppliers and ask for the same type of outreach in return. This
is especially important regarding timelines.

3. Understand Their Business

While you don’t need to necessarily understand every nuance about a supplier’s business
model or operating procedures, having a general working knowledge of their policies will
help you to better understand their values. It will also give you context to the challenges they
face, which is especially important if you work in a business with shifting priorities and
deadlines that requires a great amount of flexibility. If you understand why a supplier might
say “no,” it makes it much easier to plan ahead.

4. Plan for Contingencies

There are normal everyday contingencies you should plan for, like late shipments or weather-
ruined pallets. There are also major disruptions to plan for, like natural disasters or critical
equipment failure. Most of these contingencies will probably be developed in-house, but you
should make a concession for your suppliers and make sure they have a clear understanding
of how you will expect them to behave should the unthinkable happen.

5. Put as Much Thought Into Rewards as Penalties

Penalties are there for those times when someone does not hold up his or her end of the deal.
With that in mind, there should also be a reward for when work is above and beyond
expectations. Thinking about worst case scenarios is important, but also assume that suppliers
will exceed your expectations, and that they should be rewarded when they do. A reward
could be an especially prompt payment or a simple “Thank You” note.
6. Accept Accountability

Both the client and the supplier are responsible for the success or failure of the working
relationship. Accept accountability for your place in the process by acknowledging that your
decisions, delayed timing or changes in project scope directly impact the supplier’s ability to
do his or her job well.

7. Invest in Supplier Management Software

This is really to preserve your sanity or the sanity of your office manager. Supplier
relationship management (SRM) software is especially important as the number of suppliers
you work with grows. It can be used to monitor supplier performance and keep all of your
supplier details in one place. Many SRM programs also interface with accounting software,
making for a seamless invoicing experience.

8. Pay On Time

Your supplier does a job and should be compensated for it. Consider the last time a customer
was late paying you. Even if they had told you the check would be a few days late, consider
the slight annoyance you felt at having to wait, and the relief you felt when the check finally
arrived. Paying your vendors on time demonstrates that you respect them and the work they
do.

9. Stay Flexible

This is different than planning for disasters or setbacks in your production schedule. Staying
flexible means adapting to everyday issues that arise.

10. Continuously Work on Strengthening Your Relationship

Look for opportunities outside of general day-to-day contact. If you have a quarterly meeting
or invite your suppliers to come and visit your facility, make sure to spend time with them
and forge stronger bonds. Ask your suppliers for feedback. Encourage them to have open
discussions with you about ways that the relationship could work better or more
efficiently. Supplier relationships are partnerships and as such, are also a two-way street.
VENDOR MANAGEMENT – HOW DO YOU SCORE YOUR
VENDORS?

Dr. D. R. Chaithanya , Dr. Satya Sidhartha Panda

This is a summary based on VENDOR MANAGEMENT which is done by Dr. D. R.

Chaithanya , Dr. Satya Sidhartha Panda. They are working as market research analyst for last
10 years.

In this research we came to know about what is vendor management and how a buyer selects
their vendors and on which criteria a buyer gives score to their vendors during vendor
selection process.

VENDOR MANAGEMENT - Vendor management has a number of definitions. Some

companies believe that it is the management of vendors in order to achieve better prices and
terms. Others believe that vendor management is building a relationship with your vendors in
order to obtain mutually beneficial interactions.

Its role heavily involves working closely with vendors to make purchasing decisions and
maintaining relationships with vendors for as long as the company uses them. For a
effectively vendor management you must have good communication skills, negotiation and
have interpersonal skill.

VENDOR SELECTION PROCESS –

During this vendor selection process, a period of vendor analysis is undertaken to find the
vendors who will provide quality products at keen pricing and advantageous terms. The entire
purchasing process and management of several vendors is assisted by a set of tools,
technologies and services, collectively known as Vendor Relationship Management (VRM).
Vendors align themselves with their customer’s Vendor Management System that builds an
efficient and profitable procurement relationship for both companies. Vendor performance
management is usually measured by service level agreements (SLA) and alignment to their
contractual obligations. Some companies use a balanced score board methodology.
Measurements of the relationship, account management, quality, delivery and costs are the
most common.
VENDOR SELECTION CRITERIA - Selecting a vendor is probably one of the most nerve
wracking but crucial activities a business must undertake. When you are selecting a potential
vendor, you are selecting a partner in your business and you will trust them to work with you
in a professional and profitable manner. It is important that you chose a company that can
supply your requirements now and for the near future.

SOME OF THE VENDOR SELECTION CRITERIA ARE –

1. Years in business you need to know that the company is established and ready to
service your requirements
2. Ability to constantly supply products or services.
3. Ability to supply all the products required or the complete solution.
4. Flexibility to allow changes in orders or product lines.
5. Sustainability and financial stability.
6. Prices. Discounts on the price list are always negotiable, but they are an important
part of selecting a vendor.
7. Delivery times. You need to know that deliveries can be made where and when you
want them.
8. Terms of business. Payment terms are particularly important as they impact upon your
cash flow.
9. Customer service.

VENDOR ANALYSIS – PICKING THE BEST VENDOR –

Vendor analysis is the assessment of current or prospective suppliers with respect to their:

Financial strength, Vendor’s business model, Capacity to supply the appropriate products
and services, Capabilities – what it can and cannot do or provide ,Turnover and profit levels ,
Mark-ups, price list and discounts , Reliability and quality ,Reputation , Payment terms ,
Deliveries , Ability to implement a solution if services are being purchased , Availability of
experienced staff.

Vendor Management Inventory –

Vendor managed inventory, inventory control and inventory control management. The core
objective of Vendor Management Inventory is to maintain an optimal inventory level that
will meet customer demands.
BENEFITS –

A considerable number or major retailers and manufacturers demand this procurement

process, The fulfilment process is streamlined, They are able to maintain an optimal
inventory that reduces product, staffing and warehousing costs, Deliveries to each Vendor
Management Inventory customer are undertaken on a regular basis, They are able to manage
customer demand, Emergency deliveries are curtailed.

BENEFITS OF VENDOR MANAGEMENT SERVICES –

 Sourcing of vendors, many VMS consultancies have market knowledge.

 Negotiating with vendors and completing the Master Agreement contract.
 Identifying of opportunities to cut costs and enhance vendor terms.
 Identifying vendors that are more appropriate.
 Evaluation of current vendors with respect to their performance, quality and pricing
structures.
 Evaluation of vendor catalogues in order to find products that are more appropriate.
 Experienced staffs are released from problem solving to concentrate on core
purchasing processes.
 Continual review of your vendor will lessen service problems and service failures
 VMS will lessen misunderstandings and miss communications

Conclusion: The vendor selection process as explained has to be scientific, logical and
objective Whatever the ERP that has selected for the supply chain will not be
effective unless the Vendor rating is high.