Most businesses don’t operate in a vacuum. Your organization has its core competencies and, in order to operate efficiently and effectively, will typically need support from other companies that provide goods and services that fall outside of your scope.
But in order for this to benefit your business, it’s important to find the right vendors and then manage them properly.
In this article we’ll answer the following questions:
- What is vendor management?
- Why is it important?
- How can proper vendor management optimize performance, reduce costs, and mitigate risks?
Here’s what you need to know.
What is Vendor Management?
Depending on your business, you may have a few vendors or many vendors. Some common vendors include:
- Food suppliers (i.e., fresh meat or produce for a restaurant)
- IT services or hardware vendors
- Marketing services
- Wholesale products (i.e., clothing, homeware, furniture to be sold in your store)
- Software or online tools and services
- Banking and financial services
- Office supply vendors
The list goes on and on, varying by industry type and business model. Whether you have one or one hundred vendors to support your business, you need a way to find, hire, work with, and change vendors in an optimal way.
That’s where vendor management comes in. It’s the process of managing your vendors to optimize your work with them. Typical activities that fall into this scope include:
- Researching, selecting, and onboarding vendors
- Risk management
- Invoices and bill payments
- Ensuring timely delivery
- Communication and relationship management
- Negotiating contracts
- Switching vendors or finding new ones as needed
Why Vendor Management is Important
Vendor management is important from a practical and organizational perspective. You need external goods and services for your company, and you need to know who you’re working with and how to pay them in exchange for those goods and services.
But dive a bit deeper, and there are some less obvious—but equally important—reasons vendor management is so important.
1. Reduce Costs
Choosing one vendor over another could be the difference between hundreds or thousands of dollars. Vendors in the same space want to have competitive rates, so shopping around for the best option can help you save significantly.
You can reduce costs through vendor management simply by knowing where your money is going and evaluating if it’s necessary for your business. You don’t want to spend or overspend on services that don’t add value.
2. Mitigate Risks
Effective vendor management is important to mitigate the risks inherent to daily business operations that involve multiple parties.
For example, if you own a retail boutique shop that buys wholesale clothing from a vendor, you need those items to arrive in a timely manner in order to sell them and earn profit. So, if your vendor partner is not delivering goods on schedule, there’s a serious risk to your business.
This is the same thing if your Wi-Fi fails, your printer breaks, your baking supplies don’t come in, or your marketing campaign doesn’t launch.
Choosing reliable and effective vendors ensures that your daily business operations run smoothly, thus eliminating serious risks in your business.
3. Establish Long-Term Relationships
Part of vendor management is maintaining long-term relationships. And just like any relationship, that requires strong and ongoing communication between both parties.
The more effectively you can communicate with your vendors, the more likely you are to ensure excellent service delivery and fair billing.
4. Optimize Performance
If you think of vendors as an extension of your team, it’s easy to see how they can help optimize your business performance.
When you have strong relationships with reliable vendors, your business can run smoothly. Things are delivered on time, you have what you need, and you’re not worrying about chasing vendors. This frees up time to invest in other parts of your business.
Vendor Management Best Practices
To achieve these benefits from vendor management, you need to implement best practices. Here are five steps to take to ensure you’re getting the most from this process:
1. Select the Right Vendors for Your Business
First thing first: select the right vendors through thorough research and “shopping” around. You can do this by:
- Researching online: Make sure to thoroughly investigate companies and take a look at their online customer reviews and testimonials from other clients.
- Talking to representatives: Many vendors will offer a free consultation or call so you can talk to them more about what they’re offering.
- Getting recommendations: Ask colleagues, friends, or others in your industry about vendors they use. It can help get the ball rolling if you’re not sure where to start.
As you’re researching vendors, make sure you’re also really clear on what you want from this process. Be clear on your needs and expectations so you can then weed out vendors who won’t suit your needs.
2. Conduct Due Diligence and Evaluate Potential Risks
When you’ve narrowed down your vendors to a couple of options, you want to do your due diligence on them and evaluate potential risks.
You can do this by looking at online reviews or customer testimonials, as that will help you gauge their broader reputation.
Another strategy is to discuss concerns with the vendor directly, asking how they will handle a data breach or supply chain disruption, for example. A good vendor will have strategies in place to ensure they can fulfill their commitments and problem-solve when things go wrong.
3. Establish and Communicate Expectations
You’ve chosen a vendor and vetted them—what’s next? Establish clear expectations.
You want to be on the same page as your vendors, so start the relationship by communicating clearly what you expect from them. This conversation should include:
- Scope of work: What is included in your contract and what isn’t? Is there room for additional scope to be added if needed?
- Timelines: What does an average week or month look like with the vendor? What are key dates you need to be aware of?
- Pricing agreement: What’s the detailed breakdown of prices and financial aspects in your contract?
- Deliverables and KPIs: What does “success” look like? What will make both parties happy?
Some people shy away from these conversations, but they’re important to have. Discussing expectations upfront is an important way to ensure everyone is on the same page in order to avoid contract disputes or misunderstandings later on.
4. Monitor and Track Vendor Expenses
Since reducing costs is one key goal of vendor management, it’s so important to track how much you are spending in this area.
Monitor and track your vendor expenses on a regular basis, perhaps on a monthly or quarterly cadence. Here’s what to look out for:
- Unexpected expenses: Follow up on any discrepancies or extra charges you see from vendors to ensure they are legitimate and necessary.
- Changed circumstances: If your business needs change, consider if your vendors need to as well. You might want to renegotiate a contract, change vendors, or drop the service altogether.
- Performance: Some vendors (i.e., office supply companies) are necessary and you can simply shop for the best price for what you need. Others directly contribute to your performance, such as a marketing company. So, evaluate performance and consider carefully if it’s worth the expense.
It’s a good idea to automate invoices and payments to maximize efficiency, but don’t totally “set it and forget it.” Stay active in your financial oversight so you know what’s happening with your vendors and where your money is going.
5. Measure Vendor Performance
As mentioned above, some vendors are directly tied to your performance as a company. So, it’s important to evaluate their performance and make sure it’s aligned. This goes back to those KPIs and deliverables you laid out in your initial conversation—are they fulfilling their responsibility?
If your vendors are not performing as you need them to, come up with a strategy for how to move forward. You may need to re-iterate expectations through a conversation or it might be time to terminate the relationship.
Vendor Management FAQs
What is Vendor Relationship Management?
Vendor relationship management is interchangeable with vendor management, or the process of organizing your vendors—or suppliers—to optimize performance, reduce costs, and mitigate risks. This includes vetting vendors, negotiating contracts, monitoring performance, and maintaining relationships.
What is Vendor Risk Management?
Vendor risk management is a more specific branch of vendor management. It looks specifically at the risks posed by working with external vendors, such as cyber security and data theft prevention, supply chain disruptions, or poor safety practices. Vendor risk management is the process of adequately screening and vetting vendors for potential risks.
What is a Vendor Management System?
Vendor management systems are online platforms that help you stay organized and up-to-date with your vendors. You can monitor and manage contracts, invoices, communications, and more. Popular vendor management systems are Vendor Centric, Taulia, or Airbase.
Vendor management is not a simple task, but it’s an important one. Though external to your business, they’re an essential part of your organization’s success. Follow these best practices to support efforts to reduce costs, optimize outcomes, and reduce risks.
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