The vendor management best practices you need to know
Once you learn the ins and outs of vendor management, you realize the important role it plays in growing a successful business.
Once you learn the ins and outs of vendor management, you realize the important role it plays in growing a successful business.
Managing vendor relationships, drafting contracts, and keeping lines of communication open are just some of the tasks that come together to build a vendor management process that—if managed with best practices in mind—promotes company growth and streamlines operations.
In a previous article, we discussed what a vendor management system is and how it benefits your company. In this guide, we’ll outline everything you need to know about vendor management best practices.
What is vendor management?
Vendor management refers to all the tasks and initiatives that facilitate vendor relationships, secure reliable supply chains, and optimize production cycles.
Vendor management refers to business activities like
- Cost control practices
- Outlining contracts
- Negotiating vendor terms
- Vetting vendor supply chains
- Requesting quotes on goods and services
Once you’re looking to optimize your vendor management process by applying vendor best practices, you likely already know how the end-to-end vendor management process works, including sourcing company needs to drafting purchase orders, and beyond.
Let’s take a look at some of the most powerful benefits you can expect from an optimized management process.
Benefits of vendor management
Every company handles its vendor management initiatives differently. Still, the end goal is the same— to reap as much mutually beneficial value from the process as possible.
Better risk management: With a vendor management solution, you reduce supply chain risks. You’re able to receive goods with minimal errors, lower spending, and keep production schedules on time.
Lower administrative costs: Without a vendor management framework, you risk incurring costs outside your allocated budget. Administrative costs climb higher, and deals are mismanaged—leading to a poor vendor vetting process and last-minute decisions.
Faster process life cycles: When you work directly with vendors rather than a third-party agency, you receive shipments much quicker. There is less overhead in handling the logistics, so shipments are sent directly from the supplier without any delays.
Leverage measurable results: It’s ideal to use historical data to forecast budgets and purchase volumes. An effective vendor management process enables procurement teams to work with data they can count on because they’ve established fruitful long-term vendor relationships. Vendor software—one of the best ways to manage vendor records, contracts, usage terms, and vendor reports—is a key part of making data measurable and actionable.
Improve vendor relationships: The secret to completing a project is managing the relationships between the vendors. You get all the necessary information in your vendor management system, which facilitates decision-making.
Stay compliant: Regulations—whether internal or third-party laws—are a critical part of an efficient approach to vendor management. Optimizing your approach to managing vendor relationships ensures your company stays compliant with rules and regulations throughout the whole process.
Improved vendor performance: Better vendor management requires systems. Systems require centralization, automation, and accessibility to help teams manage vendors optimally, with minimal bottlenecks or manual tasks. Vendor management software facilitates the application of best practices that enable procurement teams to improve performance.
Challenges in vendor management
Managing vendors well results in many benefits—but inevitable challenges also arise throughout the process. Each company creates and manages a vendor management approach that caters to its needs and the industry in which it operates. As a result, vendor challenges also differ. These are a few of the most common ones.
Lack of reliable vendor software: The vendor management process is often hindered by outdated manual processes. In a fast-paced environment, a lack of automation slows down operations. Without time-saving and automation features, companies are left to deal with more bottlenecks than necessary. Keeping track of which vendor does what, deals and contracts, and a log of all previous vendor deliveries becomes that much harder.
Security issues: Information security is often mismanaged, and you may be more susceptible to data security issues if you don’t have centralized software to manage your vendor ecosystem. In fact, a whopping 60% of companies don’t have an internal resource to properly assess and manage potential risks.
For example, as you digitally exchange contract terms and private information, are you doing so through secure means? In many cases, companies aren’t taking the steps necessary to mitigate security risks. This problem is exacerbated when you use point solutions for different parts of the vendor management process.
Time management: No matter your vendor management process, you’re bound to run into time-management issues. Without a proven, repeatable vendor management solution with plenty of built-in automation features, a lot of the administrative vendor tasks become too time-consuming to manage. Yet many companies haven’t onboarded the tools necessary to eliminate repetitive tasks and manual record-keeping.
Proper document management: Properly managing the exchange of documents between you and your vendors—including contracts—is one of the best ways to improve your processes. Yet too many companies manually file documents or use disjointed applications to manage siloed data. This results in spending time hunting down key documents necessary to manage vendor relationships.
Poor communication: A lack of automation, proper document management, and poor time management all result in poor vendor communication. Documents aren’t easily accessible when needed, purchase orders get lost in the shuffle, and there is no proper log of the end-to-end vetting process to add context to meetings with vendors at each step of the journey.
Best practices in strategic vendor management
The first step towards optimizing your vendor management process is understanding where your bottlenecks lie. Weak spots in your process need to be updated with solutions that cut out human error, a lack of visibility, and time-wasting tasks.
Today, that solution often boils down to onboarding software that’s flexible enough to address your biggest management issues—whether you need better contract management or are looking to log your vendor purchases automatically.
Consider an end-to-end software solution with features that help you manage all your ongoing vendor relationships. With a solution that centralizes your vendor efforts in one place and automation that puts you in control, you’re better equipped to apply these best practices. You’ll be better poised to reap a higher ROI from your vendor initiatives.
Let’s dive into some best practices.
Draft clear vendor guidelines and policies
One of the easiest ways to level up how you manage vendors is to start at the beginning. That is, take time to define clear guidelines and policies that apply at each step of the process.
This not only informs how you approach every step of your vendor process but also keeps key stakeholders—including department leaders and senior managers—in the loop on how vendor relationships are managed.
Vendor policy answers some of the more important questions, like—
- How does the vendor department operate?
- What are the vendor selection process criteria?
- How are vendor risk assessments run?
- How do you approach purchasing budgets?
- What are the most impactful KPIs you monitor and optimize for?
Any time procurement managers or key company stakeholders want insight on or have questions about the vendor management process, having clear policies and vendor management guidelines to draw from is critical.
Centralize all management practices
One of the best ways to streamline your vendor workflow is by centralizing all your vendor initiatives. Centralizing your vendor processes, including contracts, vendor history, key documents, and policies—
- Saves you time
- Facilitates the communication process
- Increases record accuracy
- Empowers teams to negotiate with real-time data at their fingertips
- Creates visibility for all the internal teams involved
- Eliminates potential bottlenecks due to siloed data
Outline clear contract management procedures
A vendor contract is a legal document that defines your expectations of a vendor and the scope of work. The contract specifies the nature of the product or service, the quantity the vendor provides, and the conditions under which the vendor supplies the product or service.
But there’s also the management of the contract itself to consider. How are your contracts being negotiated? How are contract approvals managed? Are you executing due diligence by auditing contracts to ensure compliance clauses are up to date and the terms and conditions still apply?
Consider applying internal contract management procedures to ensure you’re getting the most value out of your contract efforts. Automation is key here. For example, vendor management software can notify you as contract expiration dates draw closer, instead of relying on manual processes to remember important renewal dates.
Define process ownership
Your vendor workflow should specify who is responsible for what at each step of the management process. Establishing an overview of how the vendor management team operates facilitates internal communication and increases visibility.
Process ownership also clarifies who is responsible for what outcomes. When it comes time for vendor meetings and updates, everyone is clear on who is responsible for what outcomes and what changes they’re in charge of optimizing for.
Throughout this guide, we’ve touched on the theme of automation—and for good reason. It’s one of the best ways to quicken the vendor management process without sacrificing quality or cutting corners.
Here’s what you can automate with vendor software:
- Vendor onboarding process
- Contract renewal
- Logging and receiving purchase receipts
- Invoice approvals
- Tracking vendor metrics
- Logging supplier information
- Reporting and analytics
- Logging purchase request submissions
- Managing vendor budgets
- Receiving and logging RFPs
- Tracking scorecards
- Maintaining a third-party vendor directory
- Tracking business needs as they arise
Create and maintain a dedicated purchasing committee
Establishing a dedicated purchasing committee is a proactive way to stay on top of vendor initiatives. Committee members can include the vendor managers, account executives, unit managers, and other essential stakeholders.
It’s important your purchasing committee meets on a regular basis to ensure you’re staying on top of changes, vendor management demands, policy changes, and performance reviews.
Use KPIs to gauge vendor performance
You can’t improve what you can’t measure. This includes how your vendor relationships are performing. Tracking vendor KPIs and leveraging them to apply improvements should be an ongoing process.
Be proactive about changing direction based on key performance data. Outline your KPI goals and determine your minimum indicators. Consult with vendors to ensure you’re setting attainable business goals. Ensure every party involved is on the same page and working toward a clear, common goal.
Consider tracking and optimizing for some of the following vendor KPIs:
- Vendor defect rate
- Compliance issue rate
- Invoice and purchase order accuracy
- Successful order fulfillment rate
- Vendor supply chain lifecycle
Tips for a better vendor management strategy
A lot of vendor management success starts from simple yet impactful strategies that ensure business continuity and profitability. Staying organized, centralizing efforts, increasing visibility, and automating repetitive tasks come together to form a vendor management process that’s comprehensive, practical, and empowering.
Once you’ve applied some technical best practices, the intangibles also count in the midst of relationship building. Consider some of the following overarching vendor relationship tips for even better results:
- Establish a mutually beneficial vendor relationship by encouraging vendor feedback to help uncover key information and establish priorities. You may discover their approach to delivering value works better than you previously thought, which can ultimately shape your contract negotiations.
- Play the long game. Establish new vendor relationships with intentions that go beyond short-term and isolated purchase orders. Nurturing long-term supplier relationships is a proven way to ensure cost savings because your company has access to a reliable supply of goods with minimal issues.
- Take time to understand the needs, bottlenecks, and workflows of your vendors, rather than only your own. It’s an effective way to uncover win-win scenarios where you both get what you need. Additionally, it’s a proactive way to get ahead of any future supply chain or related tasks. Reciprocity is key here.
Establish vendor management best practices
Companies that want to stay competitive and differentiate their business stand to gain a lot from establishing a comprehensive approach to vendor management practices and optimizing every step of the vendor relationship journey.
Start by establishing a SaaS vendor management framework that puts you in control.