What is Vendor Management? Importance, Types & Steps Involved

Vendors supplying you with goods, personnel, and services have transitioned from mere providers to vital partners in business success. Establishing ties with vendors that align with your specific requirements demands a structure that also facilitates the evaluation of vendor performance, the identification and handling of risks, contract oversight, and the nurturing of supplier relationships. For the successful execution of these activities, a vendor management system (VMS) is essential.

In this article, we will explore the benefits, challenges, and steps involved in vendor management.

What is vendor management?

Vendor management is the process businesses follow to create and maintain relationships with its suppliers, mainly for controlling cost and reducing vendor-related risk. When done right, vendor management helps businesses negotiate favorable contracts, track vendor performance, maximize value, and minimize risks.

‍Vendor management is a multi-stage process for initiating and nurturing relationships with suppliers of goods and services important to your business.

The stages of vendor relationship management include:

1. Supplier or vendor selection: Beginning with an up-to-date risk profile, you qualify and categorize suppliers based on category, location, and business unit‍

2. Risk assessment: Conducting risk due diligence based on the nature of your vendor engagement‍

3. Contract negotiation: Establishing terms and key performance indicators (KPIs)‍

4. Onboarding: Integrating vendors with an understanding of risk assessment and audit status‍

5. Managing performance and monitoring/mitigating risk: Using a matrix-based approach to gain a complete view of vendors and employing a data-driven incident model

Related Read: The importance of vendor assessment in today's business landscape

Types of vendor management

Knowing about the various types of vendor management systems can help you pick the right one for your team's needs. There are eight main categories of vendor relationship management systems to consider:

1. Procurement

Procurement is getting the goods and services your organization needs from external suppliers. The SaaS procurement process involves:

• Identifying the need
• Requesting the purchase
• Reviewing the request
• Assessing vendors
• Requesting quotations
• Negotiating and signing a contract
• Receiving the supply.

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2. Vendor onboarding

Bringing new vendors into your supply chain involves processes such as due diligence, legal documentation, and training, all aimed at integrating external partners seamlessly. 

During vendor onboarding, you will:

1. Assess risks
2. Set clear expectations and requirements
3. Verify vendor documents
4. Develop an exit strategy
5. Establish a communication system
6. Provide invoicing details.
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3. Vendor relationship management

Vendor relationship management (VRM) involves strengthening ties with suppliers through strategic investments. Collaborative partnerships can lead to innovative solutions and long-term success. 

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4. Vendor risk management

Vendor risk management (VRM) involves activities to minimize the chances of suppliers causing business disruptions or engaging in fraudulent activities. 

Risks associated with vendor relationship management include:

• Cybersecurity risk involves the threat of cyber-attacks or data breaches
• Operational risk relates to disruptions in day-to-day business operations
• Legal and compliance risk involves failing to meet local regulatory requirements
• Reputational risk concerns the harm to the organization's image
• Financial risk relates to potential loss of revenue

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5. Performance management

Managing the performance of vendors requires you to set clear standards and establish KPIs. This management process helps you spot any issues with your outsourced products or services. When problems arise, you can promptly notify your vendors and work towards solutions. 

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6. Contract management

To make contract management more manageable, consider drafting a clear plan outlining the entire contract lifecycle and implementing contract lifecycle management (CLM) software. A solid plan outlines key workflows, while software automates processes and centralizes storage. 

Related Read:

• ‍Negotiating SaaS contracts: 5 best practices
• Complete Guide on SaaS Contract Management

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7. Compliance Management

Create clear guidelines and share them with your vendors. Keep an eye on their performance to ensure they meet your legal and technical requirements. Make sure your vendors follow regulations like GDPR and CCPA to avoid legal trouble and protect your reputation.

Read Also: Understanding vendor compliance and its importance in SaaS businesses

8. SLA management (Service level agreements)

SLAs set the expectations for performance, availability, and support. Meeting these agreements is important to achieving business objectives and maintaining user satisfaction. 

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The importance of vendor management

Research by SAP indicates that half of executives plan to increase their use of external labor, making vendor relationship management systems more important than ever.

By using vendor management software, you can achieve several benefits, such as:

1. Improved administrative efficiency

Automated vendor onboarding and compliance management simplify administrative tasks. Third parties can effortlessly enter their details, contacts, and compliance records, eliminating the need for complicated paperwork. 

This self-help method boosts efficiency, guarantees secure record-keeping, and reduces time spent going back and forth during onboarding.

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2. Streamlined communication

Top SaaS vendor management software includes vendor portals with 24/7 communication tools for all parties. Real-time messaging simplifies conversations with vendors, potential partners, and other stakeholders through a user-friendly chat interface.

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3. Managing risks

Some vendor relationship management software can spot compliance problems in real time, notifying businesses about expired or insufficient insurance policies. Automatic reminders help uphold compliance, decreasing the chances of human errors. 

Moreover, comprehensive vendor management solutions may provide access to experts who guide vendors in fixing discrepancies, thus improving risk management.

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4. Automated requests for proposals for job searches

Discovering the right external partner for a task becomes more accessible through automated requests for proposals (RFPs). These systems allow businesses to announce job opportunities for potential partners to bid on. 

Some advanced algorithms even match job listings with suitable local partners, simplifying the selection process and automating onboarding and compliance tracking.

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5. Short and long-term cost savings

Having a central database that offers a clear view of compliance and expenses enables companies to save money both in the short and long run. Diligent tracking of Certificates of Insurance (COIs) and compliance upkeep results in substantial savings over time.

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What are the steps involved in vendor management?

Vendor strategies are broken down into steps to enhance buyer-vendor relationships. 

1. Assess the vendor

Start by carefully assessing potential vendors to ensure they are a good match for your business needs. According to a recent survey by KPMG, 73% of businesses found vendor evaluations essential for risk management. 

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2. Establish goals

Once you decide a vendor is a good fit, lay out clear objectives for your working relationship. Make sure your goals match your bigger business plans. Companies with well-defined vendor relationship management goals have a higher satisfaction rate with their vendor partnerships.

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3. Negotiate a contract

For long-lasting vendor relationships, you should arrive at mutually agreed contract terms. Contract negotiation typically involves the following steps:

• Outlining risks
• Establishing security expectations
• Having visibility into a vendor’s subcontractors
• Setting KPIs for performance monitoring
• Defining financial terms

Research the business model of the vendor at this stage to ensure that you understand their objectives. This will help you negotiate the best terms with the vendor without sacrificing quality. 

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4. Onboard the vendor

Vendor onboarding involves collecting documentation, sharing access and/or permissions, and conducting other activities that will help the vendor integrate into your supply chain management system. It also involves establishing standards and efficient lines of communication.

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5. Monitor your vendor's performance

Vendor performance is measured by a series of KPIs that you have mutually agreed on and documented within a contract. This ensures that all stakeholders know what is expected of them. KPIs could revolve around quality, delivery, innovation, risk, cost, or customer service.  

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6. Communicate regularly with your vendors

You have to keep the lines of communication open with your vendors. That means keeping in touch, listening to their concerns, and sharing information. There are many digital tools to make this easier like Slack. With such tools, it becomes easy for you to ensure seamless onboarding and clear communication.

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7. Reward your vendors

Vendors can be appreciated and rewarded for their work by offering discounts or bonuses on your products or services. You can feature them on your platform to give them more visibility and credibility. You can also share insights and resources with them to help them perform better. In fact, even a personalized thank-you note shows you appreciate them. 

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The challenges of vendor management 

The primary challenges in managing vendors are:

1. An ineffective contract process

An inefficient contract process happens when the terms and conditions within a vendor contract are not clearly defined or specific. It leads to miscommunication, disputes, and unmet expectations. 

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2. Inaccurate expectations

Businesses may have overly optimistic expectations about what a vendor can deliver or underestimate the complexity of a project. This can lead to frustration, delays, and additional costs. 

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3. A lack of involvement

A lack of involvement occurs when businesses adopt a hands-off approach once the contract is signed. This approach assumes that vendors will autonomously meet all requirements. 

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How does a vendor management tool help businesses?

A vendor management tool provides valuable assistance to businesses in several ways:

1. Capture inquiries and perform screening

A vendor contract management tool is a central hub for handling inquiries from potential vendors. It streamlines the process of evaluating and screening vendors to ensure they meet your company's criteria. 

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2. Automate your processes

Repetitive tasks like data entry, document management, and communications can be automated. Sending and tracking vendor invoices, monitoring contract compliance, and issuing purchase orders can be handled more efficiently. Automation reduces the risk of human errors and allows your team to focus on more strategic tasks.

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3. Equip your teams with smart tools

Document storage, communication tools, real-time reporting, and analytics can be streamlined. This helps your teams make informed decisions, collaborate effectively, and gain deeper insights into your vendor relationships. 

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4. Track the performance of your vendors

You can systematically measure how well vendors meet their obligations, including KPIs and SLAs. Thus, you can identify areas for improvement, address issues promptly, and recognize high-performing vendors. It provides a clear picture of your vendor relationships.

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Vendor management best practices

Follow these best practices to optimize the vendor management process within your organization:

1. Enforce a clear vendor management policy

A clear and well-defined policy outlines vendor interaction standards, expectations, and procedures. It ensures that all team members understand their roles and responsibilities, contributing to consistency and adherence to compliance and quality standards.

For example, your company works with a SaaS provider for customer relationship management (CRM) software. Your vendor management policy dictates that the vendor must meet industry-specific data privacy regulations and provide monthly compliance reports. This policy ensures data protection and compliance alignment.

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2. Choose the right vendors for your business

Choose vendors that align with your business goals and values. A complete vendor evaluation process considers cost, reliability, quality, and long-term potential. This practice minimizes the chances of misaligned partnerships and contributes to the overall success of your business.

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3. Proactively manage and nurture vendor relationships

Regularly engaging with your vendors, providing constructive feedback, and addressing concerns proactively can lead to stronger, more collaborative partnerships. Cultivating these relationships can also result in innovative solutions, balancing mutual growth and cost-saving opportunities.

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4. Monitor and track vendor spend

Effective spend monitoring can identify cost-saving opportunities and ensure that you are getting value for your investments. This approach helps in maintaining a balanced budget and optimizing resources.

For example, you review your monthly SaaS subscription expenses and discover several team members have unused software licenses. You achieve significant cost savings by reallocating these licenses and negotiating better rates with the vendor.

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5. Measure vendor performance

To ensure that your vendors are meeting your expectations and contractual obligations, you should set KPIs and regularly assess vendor performance against these metrics. It helps identify areas that need improvement and allows you to acknowledge and reward exceptional vendor contributions.

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Streamline vendor management with Spendflo

You can simplify your company's vendor management process with automation tools like Spendflo and helpful resources for smart spending and procurement. Your finance team and budget managers can keep an eye on spending and approve with just a few clicks. 

Spendflo's comprehensive spend management platform can strengthen your relationships with vendors and provide your finance team with more efficient processes.

Uncomplicate Vendor Management - Tap into Spendflo’s powerful platform, benchmarking data, andnegotiating expertise to streamline your SaaS stack.

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