In layman’s language, Vendor Management is a process in which the vendors are hired by an organization. These vendors are effectively managed such that they are beneficial for the organization.
Before understanding the term vendor management it’s important to understand the meaning of vendor. A vendor is a supplier or provider in the supply chain. He is responsible for the further distribution of goods or products in the market.
A vendor can either be a person or an entity. Vendors acquire goods and then further distribute them in the market. Furthermore, vendors are not necessarily suppliers.
1. What Is Vendor Management?
Companies are usually focused on developing and manufacturing goods. Hence, small and medium-scale businesses outsource the role of distribution to third parties. These third parties are known as Vendors.
Now, vendor management is a procedure under which vendors are recruited. Further, they are managed by the company. Organizations use vendor management strategy in a way that helps the company favourably.
1.1. Definition of Vendor Management
Vendor Management is an end-to-end process. It is a process used by organizations to manage and handle their vendors.
The Vendor Management process includes:
- Selecting vendors
- Explaining their roles and responsibilities
- Evaluating their performance and
- Rewarding them for benefiting the organization through their service.
1.2. Examples of Vendor Management
Let us understand vendor management through the following example:
A furniture manufacturing company will collect all the raw materials. They are required for developing various furniture items. For instance sofas, beds, dining tables, etc. Now the company can:
- Either sell these final products to the end users, or
- Can sell them through vendors like furniture selling shops.
If vendors are hired to sell the products the company needs to constantly monitor the vendor. This is for the betterment of the organization, as well as vendors and end users.
1.3. Vendor Management System (VMS)
VMS is a software solution that helps organizations in finding and managing the vendor. It is a complete solution that handles all the obstacles faced in managing the vendors. This software performs all the functions that a vendor management team does.
One of the best examples of a Vendor Management System is the SAP Fieldglass. It is a cloud-based software platform that provides solutions for various common corporate issues.
2. Importance of Vendor Management
Vendor Management is an important aspect of the company’s success. Let us further understand its importance:
2.1. Helps Controlling Costs
Vendor management helps in the following:
- Minimizing clerical work.
- Enhancing communication between customers and office departments.
- Improving transparency in the organization.
- Simplification of procedures for effective operations.
All of these factors help in higher cost savings.
2.2. Minimizes Risk
Vendor Management helps identify potential vendors. Furthermore, it helps in identifying unexpected risk factors. These risk elements are associated with suppliers and their adherence to different rules.
Additionally, vendor management helps in tracking the suppliers. In case of any fraudulent activity, the company can take precautionary measures. A company can also appoint an alternate supplier.
2.3. Services to Customers
Vendor management is not just limited to services that suppliers offer before selling a product. It also tracks vendors to evaluate whether they meet consumers’ demands after selling the goods.
A happy and satisfied customer is a potential loyal customer. Hence the organization should see to it that the vendors properly imply the post services.
2.4. Improved Performance
Proper vendor management in place can help in tracking the suppliers and measuring their performance. This is known as performance management.
If the performance of the vendor is not on par with the requirements laid down, the company can either:
- Replace the vendor, or
- Warn him.
Furthermore, good vendor management helps in improving the efficiency of the vendors. This ultimately benefits the organization.
2.5. Built Strong Relationship
Loyal and hard-working vendors who work for the success of the company should be treasured. Good vendor management includes respecting and honouring your vendors.
Also, creating a close and strong bond with vendors is essential. A vendor management system should focus on enhancing the relationship between the vendor and the Company. This will ensure a smooth process and efficiency in the supply chain.
2.6. Safeguarding Reputation
A company’s reputation is very crucial. It takes years to build the brand. A vendor management system ensures that the reputation of the company is not harmed by the negligence of the vendors associated with the company.
Moreover, customers relate vendors with the manufacturers. Even if it is the fault of the vendor the ultimate blame would be on the organization. Hence vendor management should focus on safeguarding the company’s reputation by keeping close track of the vendors.
2.7. Correct Usage of Resources
It’s a long and expensive process to identify and hire vendors one by one. However, having an efficient vendor management system in place helps in easing down the whole process.
A vendor management system helps in identifying vendors with their strengths and weaknesses. This further helps in the decision-making process. Additionally, it also has all the required vendor data. For instance, contact numbers, addresses etc.
3. Vendor Management Process
The following are the steps involved in an effective vendor management process:
3.1. Identifying Vendor
The first and foremost step in the vendor management process is identifying a suitable vendor. The vendor must be able to meet the requirements established by the company. Evaluating and hiring the right vendors is the most crucial decision. Wrong decisions can hamper the business.
Thus, appointing verified and professional vendors is of utmost importance for a long-term association. Furthermore, before appointing the right candidate it’s important to consider the following vendor-related information:
- Margin taken by them/ Pricing
- Association with other organizations
- Service Quality
3.2. Selecting Suitable Vendor
After analyzing and evaluating it is time for appointing the vendor. This selected vendor shall work for the organization in delivering the commodities to the final consumers.
3.3. Setting Goal
Once the vendor is selected they must be made aware of the expectations set by the company. It is crucial to set objectives and goals for the vendors.
Furthermore, make sure that they meet these business goals. In this stage, the vendors are made aware of the policies of the company and their role in the organization.
After verbal discussions, it’s time to put it on paper for future reference and create obligations for both parties.
Under this phase, the agreement is discussed. There will be ongoing discussions about roles and responsibilities, costing, pricing, and margin of profit. This is a negotiation stage wherein both parties will put forth their points and come to a conclusion.
3.4.2. Vendor Management Contract
After negotiation comes the final contract. A contract is created between the company and the vendor. This contract shall be legally binding on both the parties. In case of any discrepancies in future, this contract shall be referred to.
3.5. Communication with Vendors
To maintain an efficient functioning of the organization, regular communication with vendors is crucial. Also, frequent communication results in strong vendor relationships. In this way, the vendors are aware that the company has an eye on them. Additionally, regular communication helps in resolving any issues faced by either party.
3.6. Vendor’s Performance Evaluation
The next step in the vendor management process is the performance evaluation of the vendors. Evaluation can be done on a weekly, monthly, quarterly or half-yearly basis. Furthermore, vendor performance evaluation may include key performance indicators. This means understanding the amount of work done by the vendor as promised by him in the beginning.
In case of any shortcomings in performance, the vendor can be held accountable. Additionally, if the performance of the vendor is above expectations he can guide the company in enhancing the policies of the company.
Vendors strive hard to attain business objectives. Hence moral obligations are created for the organization to reward its vendors for their services provided. Rewards can be given in the following forms:
- Increasing the margin of commission,
- Bonuses or,
- Extra perks or benefits as the company deems fit.
Additionally, rewarding is a way of encouraging vendors to perform well. Also, it helps improve the success rate of the company. Furthermore, rewards also encourage healthy competition between the vendors.
4. Vendor Management Benefits
4.1. Better Reach
Vendor management in an organization helps in procuring the best vendors available in the market. Furthermore, appointed vendors usually have better reach in the market. Hence they can deliver the products in areas which are difficult to reach by an organization.
4.2. Helps in Understanding Customer Views
Vendors are the ones that directly deal with the end consumer and the manufacturer. Hence, they are the crucial link in a supply chain wherein they have an idea of both parties.
Vendors are in a better position to inform the requirements and feedback of the consumers to the organization. Similarly, he can introduce new commodities to the consumer so that they can try them. All this can be attained if the vendor management is properly functioning.
4.3. Constant Improvement
Vendor management constantly works in a direction that strengthens the relationship between vendors and the company. Additionally, it also functions in a way that is advantageous to both parties. For instance, keeping track of vendors, managing the vendors, looking for new compliances and so on.
5. Obstacles in Vendor Management
5.1. Finding a Suitable Vendor
Finding a vendor that meets the standards set by the organization is difficult to find. Also, if the company finds one he should be at par with the rules of the organization.
5.2. Tracking Compliances
When there are several vendors involved and associated with an organization. Tracking every single vendor is a difficult task. Additionally, checking whether the vendors are complying with the regulations or not is a huge task.
5.3. Managing Vendor Relationships
When the organization is huge its geographical market and vendor list are also quite vast. Hence, managing these diversified vendors all over the globe is a huge task for the vendor management team.
5.4. Monitoring Vendor Performance
It becomes quite challenging to evaluate the performance of vendors that are scattered across. It’s easy to manage one or two vendors. However, when there are a lot of vendors, the following problems are faced:
- Tracking their activity and
- Evaluating their performance.
5.5. Managing Contracts and Other Documents
Agreements and other related documents need to be updated from time to time. Upgrading contracts helps in the smooth functioning of the organization. If there are a large number of vendors involved it becomes an exhausting task to review and update each one of the contract.
6. Vendor Management Software
Vendor Management Software (VMS) is a computer-based software. It was developed to increase efficiency and reduce flaws in manual vendor management systems.
Furthermore, finding potential vendors and maintaining their records manually is difficult. However, a good VMS in place can ensure that you meet and contact the right vendor. Also, it helps in the proper management of the vendors and other related compliances.
Lastly, VMS helps in meeting business goals. All this is accomplished at an affordable price. There are numerous benefits associated with installing a VMS in an organization.
For meeting business objectives Vendor Management tool alone is not sufficient. Vendor Management best practices should also be adopted.
6.1. Key Features
- Organized Approach: VMS enables organizations to have a more systemic and organized approach toward vendors and their management.
- Extensive Reporting: VMS helps in generating data about the vendors. Additionally, it helps in evaluating the performance of vendors.
- Quick Tracking: This software helps in tracking numerous vendors spread all over. It also has all their details which helps in saving time and cost.
- Better Compliance: Companies can use VMS to implement the regulations of the company policy. All the vendors associated with the organization should abide by these rules.
6.2. Few Best Vendor Management Software
- Gatekeeper is helpful for large organizations who find difficulty in the implementation of regulations. It also provides security measures to protect the organization from third parties.
- SAP Fieldglass is one of the leading vendor management systems. Furthermore, it has an amazing set of features which includes strong connectors and advanced automation capabilities.
- Genuinty is intended to assist the IT Professionals. Also, there are tons of features for minimal charges.
- Precoro is useful for assisting small and medium-sized companies at a reasonable cost. Furthermore, it has several helpful features.
- Onspring is just the right option for first-time users who just need some additional support. This VMS has the best customer service and training opportunities.
7. Frequently Asked Questions
7.1. Are Vendor Information Management and Vendor Relationship Management the Same?
Though both are handled by the same software their functions are different.
Vendor Information Management is a system that is used to record, save, update and evaluate the vendor’s information. This can either be their personal or professional information.
Whereas, Vendor Relationship Management refers to a system in which the focus is on enhancing the relationship between the buyer and the vendor.
7.2. What Skills Must Vendor Managers Possess?
Vendor Managers are also known as Purchasing Managers. They are crucial links between the vendors and the company. They must possess the following skills:
- Analytical – To analyze the various data and information provided by vendors.
- Communication – As vendor managers are intermediate, they must possess excellent communication skills.
- Negotiation – So that they can negotiate better with vendors on behalf of the Company.
Additionally, they should be aware of the current market trends and should adapt to them accordingly.
7.3. What Points Are to Be Considered When Looking for a New Vendor?
Typically the vendor should meet the criteria laid down by the organization. The following are a few points considered when evaluating vendors:
- Product Quality
- Reputation between customers
- Pre and post-customer services
7.4. How to Deal with Inefficient Vendors?
Firstly, the vendor must be contacted to discuss inefficiency in completing tasks and attaining goals. Secondly, if the issue is caused by the negligence of the company itself then that should be resolved. However, if the vendor is responsible he should be given a warning along with a deadline to meet the expectations. Lastly, despite the warning, if there is no improvement then the vendor can be replaced.
7.5. What Is Vendor Risk Management?
Vendor Risk Management (VRM) is a process of evaluating the risk factors of a third party. A proper VRM will ensure that the reputation of the buyer is protected. It also keeps track of any unethical practices carried out by the vendors and shows measures to eliminate them. Furthermore, it is a method of establishing professionalism in the operations and administration of a company.
8. End Note
To sum up, the vendor management system is a process used by an organization to manage the vendors. It includes activities such as finding suitable vendors, negotiating contracts, reducing vendor-related risk, and controlling costs.
A good vendor management system also safeguards the organization from loss of fraudulent activity caused by vendors.
Furthermore, vendor management ensures that the vendors adhere to the needs of an organization. Additionally, it also helps in monitoring the contributions made by suppliers in achieving the objectives of the Company.
An effective vendor management system in place is not only beneficial for the company. But for the whole supply chain which includes the suppliers, vendors, and final consumers.