What Is Vendor Management? (+Challenges, Process, Tools)
- Published:
- Updated: October 4, 2024
Every year, corporations, nonprofits, and governments spend trillions of dollars procuring the supplies they need to maintain their daily operations.
A huge amount of procurement spend is wasted annually, as employees fail to follow S2P process governance, use incorrect vendors, and onboard redundant suppliers.
Vendor management enables procurement teams to overcome these supplier-related challenges. A vendor management strategy is a source of truth for managing an end-to-end procurement relationship for a company and its preferred suppliers and vendors.
In this guide, we’ll cover the types of vendor management, break down the entire process into actionable steps, highlight the challenges you should be prepared for, and highlight the best vendor management system (or VMS) to help manage your supplier relationships.
What Is Vendor Management?
Vendor management is a set of practices that businesses follow to find the right vendors and build mutually beneficial relationships with them to control overall cost, reduce risk, and continue to offer excellent service. It involves vendor analysis, sourcing, contract management, performance reviews, and all the other interactions that you might have with your suppliers.
Often, companies only create processes to manage the first few stages of vendor management – the stages where they source the most cost-effective solution and sign a contract. However, creating an effective vendor management framework offers benefits far beyond just agreeing to a relationship.
Goals of Vendor Management
The three main goals of supplier and vendor relationship management include developing strong vendor relationships to secure better prices, evaluating your vendors to identify your best partners, and establishing a risk management plan.
Let’s explore each in more detail:
1. Develop vendor relationships to negotiate better deals
Vendor relationship management (VRM) refers to the process of deepening your relationships with suppliers by ensuring the proper investment into the alliance. The objective of vendor relationship management is to get the maximum possible value from a contractual arrangement.
With a vendor management strategy, organizations can build personal relationships with vendors and suppliers, allowing them to negotiate better prices and secure more lucrative deals. Often this includes regular check-ins with vendors on how the relationship is going, inviting vendor point-of-contacts on company outings, understanding their company’s professional goals, and getting to know vendors on a personal level.
2. Evaluate and improve vendor performance
Supplier and vendor relationship management provides companies with a structured method for identifying critical partners for the potential benefits and risks they pose to the company’s overall success. Establishing a system for consistently and effectively evaluating supplier performance helps buyers decide which relationships are most critical to nurture and when to part ways.
Vendor management strategies enable procurement teams to monitor and analyze vendor performance and help identify which vendors are high-quality and underperforming or provide risk. The ultimate goal is the retain the vendors that are the most efficient and who have built the strongest relationships with your company, and move on from those who are less than ideal.
Vendor management strategies require procurement teams to identify performance metrics and KPIs, have the technology infrastructure to track these metrics, benchmark metrics, and compare vendors against one another. Here are some examples of vendor performance KPIs and metrics that a vendor relationship management team can track to evaluate, benchmark, and improve vendor performance:
- On-Time Delivery Rate: Measures the percentage of deliveries made by the vendor on or before the agreed deadline, providing insight into their reliability and timeliness.
- Quality Defect Rate: Tracks the percentage of products or services received from the vendor that have defects or do not meet quality standards, helping assess the consistency of vendor output.
- Cost Variance: Evaluates any deviations from the agreed budget, allowing you to assess if a vendor is staying within the expected cost parameters and helping manage financial performance.
- Contract Compliance: Measures how well a vendor adheres to the terms and conditions of the contract, including service-level agreements (SLAs), to ensure they meet their contractual obligations.
- Vendor Responsiveness: Tracks the speed and effectiveness of a vendor’s responses to inquiries, issues, or change requests, providing a measure of how effectively they communicate and resolve problems.
- Customer Satisfaction Score: Gathers feedback from internal stakeholders who work directly with the vendor, measuring satisfaction levels and identifying areas for improvement in the vendor relationship.
- Lead Time: Evaluates the time it takes for a vendor to fulfill an order from request to delivery, offering insights into their efficiency and ability to meet urgent requirements.
- Inventory Accuracy: Assesses how well the vendor’s inventory data matches actual stock levels, important for procurement planning and maintaining supply chain stability.
- Service-Level Agreement (SLA) Compliance Rate: Measures the vendor’s adherence to agreed-upon SLAs, ensuring they consistently meet required performance standards, such as uptime or support response time.
- Issue Resolution Rate: Tracks how quickly and effectively vendors address issues, indicating their commitment to maintaining service quality and resolving any disruptions that arise.
3. Establish a risk management plan
The final goal of supplier and vendor relationship management is to use all the knowledge and insight gathered from tackling the above goals to build a plan to mitigate supplier-related procurement risk to the larger company. Vendor risk management, also known as VRM, is a set of activities to reduce the likelihood of suppliers causing business disruptions or taking fraudulent actions.
Examples of potential vendor-related risks include:
- Supply Chain Disruptions: Vendors failing to deliver products or services on time due to natural disasters, political instability, or financial issues can cause significant operational delays.
- Quality Issues: Poor-quality products or services from vendors can negatively impact your company’s offerings, customer satisfaction, and brand reputation.
- Compliance and Regulatory Risks: Vendors not adhering to legal or regulatory requirements can result in compliance issues, potentially leading to fines, penalties, or reputational damage.
- Financial Instability: Vendors experiencing financial problems may suddenly cease operations or fail to fulfill contractual obligations, leaving your company vulnerable to operational gaps.
- Data Security Risks: Vendors with weak cybersecurity practices pose a risk of data breaches, potentially compromising sensitive company or customer information.
- Brand-Related Risks: Vendors who align fringe personalities, promote controversial ideas, collaborate on unsafe products, and advertise to problematic audiences can carry risk to your company’s brand as well.
Once it’s clear which suppliers and vendors have the most significant impact on the business’s success, buyers and procurement teams can establish a risk management plan to safeguard against disaster if supply chain issues arise.
83% of companies have faced a third-party-related incident that has driven negative business consequences in the last three years. 59% of respondents confirm that their organizations experienced a data breach caused by one of their suppliers. To mitigate these risks, you’d better perform the assessment process for each of your potential and existing vendors.
Benefits of Vendor Management
We’ve already touched upon vendor management benefits such as cost savings and reduced risks. Let’s see the full list of perks coming with a proper vendor management strategy:
- Better vendor sourcing: A comprehensive vendor management plan supports selecting the right strategic vendor partners. By identifying business needs and setting clear expectations, a business can find and invest in high-quality supplies that pay off in the long run.
- Streamlined vendor processes: When the responsibilities of both a buyer and vendor are outlined, it’s easier to establish smooth workflows. Delivery, compliance, and payments are managed according to a pre-defined scenario, making it easier to guarantee predictable outcomes and an overall more effective procure-to-pay process.
- More efficient vendor onboarding: Onboarding new vendors and getting them up to speed might take a lot of time and resources. With a vendor management system, new vendors follow a tried-and-tested path, which allows them to navigate through the onboarding process faster.
- Reduced risk of supply chain disruption: Vendor management gives you better control over your supply chain and eliminates the risk of disruptions. Managing vendor relationships lets you obtain critical vendor information promptly and oversee possible issues.
- Better vendor relationships: You can’t eliminate the human factor from your relationships. Effective supplier management strengthens loyalty and encourages your vendors to maintain the quality of provided products or services.
- Reduced costs and more efficiency: With strong vendor relationships, procurement teams can negotiate better rates. It also empowers S2P teams with the data and insights to identify hidden costs and friction points in your procurement process, allowing you to control your vendor and purchasing-related expenses better.
- Improved SLA management: SLA management keeps track of these contracts and ensures vendors meet the terms outlined there. As a part of SLA management, buyers may also lay out the metrics by which the service or product is measured and the penalties applied if the outlined requirements are not fulfilled.
- Better contract management: Managing vendor contracts can be a headache for your legal team or procurement managers. You can facilitate it by building a contract management plan and implementing contract lifecycle management (CLM) software or leveraging procurement software. A clear plan will draft the key workflows for the entire contract lifecycle, and software will help you automate the processes and store everything in one place.
- Better compliance management: The key to successful vendor compliance management is drafting a policy that sets clear expectations and provides unambiguous guidelines. When it’s in place, all you need to do is to communicate it to your vendors and keep an eye on their performance.
Stages of the Vendor Management Process
Here are the six stages involved in the supplier and vendor management process:
1. Discovery, research, and selecting vendors
Vendor management starts with proper research. You need to find a vendor best suited for your needs based on a set of criteria:
- Industry-related experience
- Business management and operations
- Rates
- Associated risks
- Economies of scale
- Social proof
- Terms and conditions
- Legal considerations
Most businesses will have many suppliers and vendors to manage. To get started, procurement teams should identify and separate vendprs into different categories, requiring different strategies and resources. Part of this process also involves ordinating them regarding their effect on the risks and potential for success they pose for the company.
Determining the extent of these effects might have to do with the nature of their products and services, the amount of money the company spends on those goods and services, and the innovation potential they can supply.
Building this map will allow buyers to pinpoint the most and least critical relationships to nurture through vendor relationship management and provide an initial idea of what will be required to build those relationships.
2. Contract negotiations
To set the foundation for long-lasting vendor relationships, you should reach mutually beneficial contract terms in the first place. The negotiation process includes:
- Outlining risks
- Setting security expectations
- Getting visibility into a vendor’s subcontractors
- Agreeing upon KPIs for performance monitoring
- Defining financial terms
It’s good to research your vendor’s business model at this stage and try to understand their objectives. This way, you’ll manage to negotiate the best terms without sacrificing the supply quality.
3. Vendor onboarding
Once the vendor is approved, they’re onboarded into your company’s system. To set them up for success, you’ll need to introduce them to the relevant procedures, establish standards, and set efficient lines of communication.
The vendor onboarding process involves collecting the documentation, sharing permissions, and other activities aimed at integrating a new vendor into the supply chain.
4. Monitoring performance and managing risk
You can’t always be sure that your vendors will keep to the standards set in your contract. That’s why you should be continuously monitoring supplier performance until the contract is terminated.
To make it easy to assess the performance of your vendors, you’d better set KPIs when negotiating contract terms. These might include:
- Order completion time
- Shipping time
- Product or service quality
- Compliance
- Customer service quality
Keep track of these performance metrics and keep open communication with your suppliers to have full control over your supply chain.
5. Payment collection and processing
Strong vendor relationships are based on mutual respect. The best way to show your respect to vendors is by making payments on time, in accordance with the terms outlined in the contract. Vendor management entails building a standardized procedure for processing invoices and making payments, eliminating unnecessary friction from the processes.
6. Feedback from vendors
You aren’t the only party that can share their feedback. It’s important that your vendors also feel encouraged to provide their views of this collaboration. Collecting feedback from vendors will help you get a 360-degree view of the state of things and make more informed decisions.
Challenges of Vendor Management
On your way to a strong vendor management program, you need to overcome certain challenges.
- Centralized view of vendors: You work with dozens of vendors – from coffee capsule suppliers to employee engagement software providers. Organizing and managing them effectively is impossible without suitable processes and tools.
- Vendor onboarding and support: You can’t standardize the onboarding process when dealing with vendors in different sectors. It would help if you could personalize onboarding while delivering a consistent experience.
- Reliance on certain vendors: With strong buyer-vendor relationships comes the danger of supplier overreliance. What if you lose them? Your business operations will inevitably be disrupted unless you have a supply chain backup plan.
- Keeping vendor data clean and compliant: With a vendor management system, your employees who are vendor and supplier-facing will be required to update order and vendor forms. However, companies will have various processes for different vendors and unique workflows for contextual situations. With a tool like Whatfix, you can provide just-in-time support that enables employees with Smart Tips that provide information on what vendor data must be updated and in what format.
- Supplier and vendor diversity: While turning a few preferred vendors into a “go-to” partner can be beneficial in certain respects, it poses significant risks for the company. While lower rates and strong relationships provide a cost-benefit, placing your entire supply chain needs on a few vendors can increase risk.
What Is Vendor Management Software?
Vendor management software is a platform designed to help businesses build relationships with suppliers, procure supplies, process payments, facilitate vendor or supplier communication, and seamlessly manage the entire vendor process and relationships—all in a centralized application.
SaaS vendor management applications manage and modernize four major company-to-vendor pain points:
- Communication and relationship management
- Project coordination and management
- Contract and payroll management
- Compliance management
Features of Vendor Management Software
Here are the key features a vendor management platform should have to be able to support your procurement needs:
- Centralized vendor and supplier dashboard: Single source of truth for managing suppliers and making vendor-related decisions. This includes tracking previous and current purchases, assessing vendor risk profiles, analyzing supplier metrics, collecting payments and tax info, e-invoicing, and more.
- Vendor acquisition, evaluation, and onboarding: Vendor management software organizes all the purchasing workflows and processes vendors need to adhere to to get up to speed faster.
- Vendor communication and collaboration: Without a healthy communication process, suppliers may deliver the wrong products, orders may get delayed, and disputes may arise. A vendor management platform can communicate exactly what a customer wants for each order, the terms the supplier will supply them for, and how long these terms are applicable.
- Contract management: Vendor contracts explain how both parties will work together, the terms of the agreement, and severance terms that come into force if your vendors default. Vendor management software makes it easy to create these contracts from scratch or via a template, and workflows are used to manage them at scale.
- Supplier and vendor support: Effective vendor management goes beyond transactions and contracts; it involves supporting your suppliers to ensure mutual success. Vendor management software facilitates this by offering a dedicated support channel for suppliers to report and resolve issues quickly.
- Data archives and integrations: Your vendor management platform provides historical data on every transaction, issue, and decision made regarding supplier issues. Similarly, vendor management platforms can integrate with third-party finance and operation tools like Xero, Slack, and Quickbooks.
Best Vendor Management Systems
The following vendor management systems will help you address supplier and vendor challenges and build streamlined processes.
1. Airbase
Airbase is a comprehensive spend management platform that includes robust vendor management capabilities. It is designed to centralize and streamline the end-to-end process of managing vendor payments, expenses, and corporate cards.
By automating accounts payable, purchase orders, and expense reimbursements, Airbase helps organizations achieve greater control and visibility over their spend with vendors, enhancing the efficiency and accuracy of financial operations.
Key features:
- Integrates non-payroll spend, including accounts payable, expense reimbursements, and corporate cards, in one platform.
- Automates the entire accounts payable process, from vendor onboarding to invoice processing and payment.
- Streamlines the creation, approval, and tracking of purchase orders to ensure compliance with procurement policies.
- Offers detailed reports and analytics for a transparent view of spending by vendor, category, and department.
- Provides a self-service portal for vendors to submit invoices, update information, and track payment status.
- Configurable workflows ensure that expenditures are reviewed and approved by the appropriate personnel.
- Supports a range of payment methods, including ACH, virtual cards, and checks, automating payment processes and reconciliation.
- Enforces spending policies and controls, with built-in compliance checks and audit trail
2. SAP Fieldglass
SAP Fieldglass is a leader in cloud-based vendor management systems that help organizations find, engage, manage, and pay their external workforce, including contingent workers and services managed through Statements of Work. It is particularly well-suited for large enterprises that need to manage a wide array of vendors and contingent labor across different geographies, ensuring compliance and optimizing costs.
Key features:
- Manages the entire lifecycle of vendor interactions, from procurement to payment, across multiple categories of external talent.
- Helps ensure adherence to country-specific labor laws and regulations, reducing risks associated with global workforce management.
- Provides analytics and reporting tools to gain insights into workforce spend, vendor performance, and labor market trends.
- Automates and standardizes procurement processes, including bidding, contract management, and invoicing.
- Seamlessly integrates with other SAP solutions, enhancing enterprise data consistency and operational efficiency.
- Helps negotiate and manage supplier rates to ensure competitive pricing and cost efficiency.
- Tracks and evaluates vendor and worker performance to maintain high service standards and accountability.
- Offers a mobile app for easy access to VMS functionalities, enhancing flexibility for managers and vendors.
3. Precoro
Precoro is a cloud-based procurement software designed for small to medium-sized businesses to automate purchasing processes and control spending. It offers a user-friendly interface that simplifies the creation of purchase orders, management of suppliers, and tracking of spend without requiring extensive training. With features like automated workflows, budget tracking, and spend analytics, Precoro helps businesses optimize their procurement processes and improve their vendor management efficiency.
Key features:
- Enables the creation, approval, and electronic sending of purchase orders to vendors, reducing manual effort and errors.
- Centralizes supplier information for easy access and management, enhancing the organization of vendor data.
- Tracks and manages budgets in real-time, ensuring spending stays within allocated limits.
- Offers comprehensive analytics and customizable reports to monitor and analyze spending patterns and vendor performance.
- Tailors approval workflows according to organizational structure and procurement policies.
- Supports the processing of invoices electronically, streamlining the accounts payable process.
- Allows for the creation of customizable catalogs to ensure users purchase from preferred suppliers at the correct prices.
- Integrates with major ERP and financial systems to synchronize data and improve data accuracy.
4. Procurify
Procurify is a spend management solution that enables companies to follow proactive spend controls while providing a user-friendly and flexible procurement process. Ideal for mid-sized companies, Procurify offers tools to manage and control spending effectively, with robust workflows for purchasing, vendor management, and expense tracking. Its emphasis on user experience and real-time data helps businesses streamline their procurement activities and achieve better cost management.
Key features:
- Simplifies the process of requesting, approving, and purchasing items, ensuring compliance with procurement policies.
- Stores and organizes all vendor information, making it easy to access and manage ongoing vendor relationships.
- Provides visibility into budgets and spending in real-time, allowing for immediate adjustments and better financial control.
- Configurable approval workflows ensure that all expenditures are properly reviewed and authorized.
- Delivers insights into procurement data to help identify spending trends and opportunities for savings.
- Facilitates the capture and reconciliation of receipts and invoices to improve the accuracy of financial records.
- Offers a mobile app for managing procurement processes on the go, enhancing accessibility and convenience.
- As a cloud solution, it provides secure access to procurement data from anywhere, facilitating collaboration and remote work.
5. Kissflow Procurement Cloud
Kissflow Procurement Cloud is a flexible procurement platform designed to unify and automate the entire range of procurement activities. Through an integrated suite of tools, it helps organizations of all sizes control spending, manage vendors, and ensure compliance. From purchase orders and invoicing to vendor management and analytics, Kissflow aims to simplify procurement processes and make them more strategic with less administrative burden.
Key features:
- Offers a single platform for managing procurement, purchase orders, approvals, vendor management, and payments.
- Automates key procurement processes, reducing manual tasks and speeding up operations.
- Provides a self-service portal for vendors to submit invoices, update information, and communicate with buyers.
- Features advanced analytics tools to track spending patterns, vendor performance, and compliance.
- Allows businesses to customize procurement workflows, forms, and fields to suit their specific needs.
- Integrates with various financial and ERP systems for seamless data flow and consistency.
- Streamlines the creation and approval of purchase requisitions and orders, enhancing efficiency.
- Supports managing contracts within the platform, with alerts for key milestones and expiry dates.
6. PRM360
PRM360 is a comprehensive procurement solution designed to automate and optimize the end-to-end procurement cycle for businesses of all sizes. It focuses on enhancing the efficiency of procurement operations, from sourcing and purchasing to supplier management and analytics. PRM360’s strength lies in its ability to provide a holistic view of procurement activities, support strategic decision-making, and foster collaborative relationships with vendors.
Key features:
- Facilitates the sourcing process with tools for supplier selection, bidding, and negotiation.
- Automates the creation, approval, and tracking of purchase orders, ensuring accuracy and timeliness.
- Provides features to manage supplier profiles, performance, and collaboration effectively.
- Offers an online procurement process to streamline purchasing, reduce costs, and improve cycle times.
- Delivers detailed reports and dashboards to clearly understand procurement metrics and supplier data.
- Manages contracts from creation to renewal, with notifications for key events.
- Helps monitor and control spending against allocated budgets to avoid overspending.
- Enables the use of approved vendor catalogs to ensure compliance and competitive pricing.
7. Oracle Procurement Cloud
Oracle Procurement presents a tool suite for automating procurement, strategic sourcing, and supplier management processes. Its tools facilitate shopping, order creation, vendor monitoring, payments, reporting, and other processes involved in vendor management.
8. Vanta
Vanta is a platform automating the processes of compliance certification for vendors. It makes it easy to craft policies and establish processes to achieve SOC 2, ISO 27001, HIPAA, PCI, and GDPR compliance painless.
With Whatfix, drive adoption of your source-to-pay, procurement, and vendor management applications across your suppliers, vendors, procurement teams, and more with contextual in-app guidance.
With Whatfix, you’re empowered to create in-app content such as:
- Interactive walkthroughs
- Step-by-step guides
- Smart tips
- Onboarding task lists
- Embedded knowledge bases
Whatfix lays on top of all modern S2P applications SAP Ariba, Jaggaer, Coupa, iValua, and more – as well as CLM software, procurement tools, CRM systems, and more.
Whatfix is also a fantastic solution for providing personalized, guided onboarding and on-demand self-support for your vendors.
Learn more about Whatfix for S2P applications and vendor management now!
Request a demo to see how Whatfix empowers organizations to improve end-user S2P application adoption, create effective vendor onboarding experiences, and provide on-demand vendor and customer self-support
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