What is Vendor Management?
No company exists in a vacuum. Almost every business must rely on the services of others to operate. These other businesses are referred to as vendors, and vendor management encompasses the systems and processes used to manage them. Without vendors, you likely don’t have a business at all. So while you might spend more time thinking about your customers and employees, vendors are just as important and should be managed with just as much care.
Strong relationships are key to great vendor management strategy. It’s not just about two businesses working together — it’s about the people behind them and their expertise, experience, strengths, and goals.
In this guide, we’ll break down what vendor management is, why it matters, and what effective vendor management looks like in practice.
What is vendor management?
The definition of ‘vendors’ is extremely broad; depending on the nature of your business, it could include wholesalers, diversity consultants, marketing agencies, or cleaning services, to name just a few. For example, a restaurant would rely on a vendor to source its ingredients, and some companies might contract an external provider to handle their payroll and bookkeeping.
Good vendor management means documenting and evaluating every single interaction with these companies. It begins before you’ve even met, when you’re shopping around and comparing quotes. Some parts of vendor management are familiar, such as processing payments and creating contracts. But effective vendor management is an ongoing process. It means you never stop assessing how the relationship is working, and how helping both you and your vendors reach your business goals.
For some businesses, vendor management may be fairly intuitive, but it quickly becomes more complex with larger companies or those spread over a large geographical area. In these situations, the potential risks and costs of inefficiency are much higher. Specialized vendor management software and dedicated management teams are usually the best option.
Why vendor management matters
The impact of poor vendor management is wasted time, money, and energy. Imagine that your restaurant has been working with the same janitorial company for over ten years. No one’s bothered to examine whether that company is the best fit because it’s not in their job description, and there aren’t any established ways to evaluate their work. Then, you’re chatting with the owner of the pizzeria next door. You find out they’re spending much less on their service — for a kitchen that’s cleaner than yours!
When it’s done right, vendor management creates efficiency, workplace satisfaction, and profitability. When vendor-related information is well-organized and easily accessible, it’s much easier to see which relationships are meeting key performance indicators (KPIs), and to terminate or change them if they’re not.
The vendor management process
Establish goals
Get clear on your business goals and use them to create vendor selection criteria and corresponding KPIs. If cost savings is the priority, you’d go for the cheapest acceptable option; if you want to stand out from your competition, you might prioritize quality and attention to detail.
Assign leadership
Decide who will oversee vendor relations. What this looks like in practice will vary a lot between companies; a small business might have one or two existing staffers managing its vendors, while a large corporation may need a dedicated department.
Make your vendor management separate from, but in touch with other business processes. This keeps communication flowing without overwhelming your staff. For example, instead of having your legal department draw up a contract and then pass it down to the department the vendors will work with, ask for that department’s input on the contract based on what they need from the new relationship.
Get your vendor management process organized
For companies with more complex needs, vendor management software is often necessary. Procurify, Shortlist, and Third Party Bond are just a few options, each tailored to different concerns like procurement and risk mitigation. However, a smaller business might not require anything more advanced than a filing system.
Select vendors
Too often, vendor selection starts and stops with comparing price points, when in reality, there are many other factors to consider. How reliable are they? Do they provide any other services you need? Will they need access to your premises or sensitive information?
This is why getting clear on your goals is so important; if you don’t know what matters to you, you don’t have a metric to gauge potential vendors by.
Onboard vendors
Once you’ve decided on which vendors are the best fit, you need to establish the terms of your relationship. Your new vendors are becoming part of your operations, and that’s something that should be taken seriously.
Clearly communicate your expectations and negotiate a contract that protects both parties. This is also when you need to settle important paperwork around licensing, taxes and payment processing.
Remember, onboarding goes both ways. Show your vendors you care about your new relationship by providing whatever information they require. Don’t rush it: now is the time to provide everything your vendors need to do their job. That includes the obvious, like keys and alarm codes, and the minutiae, like how your team should be contacted.
Monitor and evaluate vendors
As you settle into the routine of working with your new vendors, your business goals and corresponding criteria should remain your guiding principles.
Evaluation should be ongoing; have those working directly with vendors assess performance monthly or quarterly and enter their findings into your database. Then, your vendor management team can analyze that data against your KPIs.
Because you established goals when you started working, it will be clear whether vendors are meeting your expectations, and much easier to remedy the situation if they aren’t.
Challenges and how to address them
Lack of visibility
When everyone on your team is focused on their own work, vendor relationships might take a backseat. But without oversight, it’s hard to see which ones are functioning well, leading to inefficiency and wasted resources.
That’s why a vendor management system and dedicated staff are so important. A big-picture view of your vendor relationships makes it easy to see whether or not they’re keeping you on track to your goals.
Risk management
Getting organized about vendor management will also help mitigate risk. Risks associated with poor vendor relationships include finding yourself without the tools you need because your vendor’s unreliable, or the risk of litigation because a disreputable vendor created a safety hazard or leaked private information. These are stressful situations that interrupt operations, eat into profits, and take up valuable time.
Staying aware of the risks associated with different vendors will help your team strategize how best to prevent them and establish contingency plans for dealing with them should they arise. With clear criteria to guide selection and evaluation, you can choose reputable, reliable vendors.
Relationship-building
After establishing a clear and efficient system, relationship-building is the most important part of good vendor management. As in any healthy relationship, communication is key. Make sure you and your vendors understand what it will take to meet each other’s needs. Lackluster communication will make your vendors feel unappreciated and disrespected, poisoning your relationships before they’ve even begun.
You chose your vendors because they have professional skills and knowledge you don’t; show them you respect that expertise by staying open to their ideas and encouraging collaboration. Building this kind of trust pays off; it can lead to better work by encouraging innovation and allow you to negotiate better rates.
Relationships take work
If your business has never had an organized approach to vendor management, creating one can feel overwhelming. But the end goal of systematizing your vendor management is working relationships that are efficient, stable, and mutually beneficial.
The best vendor relationships are collaborative, communicative, and help both of you work towards your goals. Treat all your vendors as valued partners, and remember that you have a lot in common: you’re both looking to grow, move forward, and do your best work.