Vendor Relationship Management: Exploring the What, Why, and How
Key Takeaways
- Vendor relationship management makes vendors feel valued and improves the company’s stature
- Vendor relationship management is a growing field that focuses mainly on nurturing the relationship between organizations and vendors
- Key benefits of managing vendor relationships is driving new efficiencies, finding profitable deals, and streamlining supply chains.
- Automating vendor management tasks is among the top vendor management best practices
Table of Contents
What is Vendor Relationship Management?
Vendor relationship management refers to the intentional efforts that your business puts into promoting healthy and productive connections with its vendors. 45% of vendor collaborations plateau out at some point in the vendor management journey. Why? A majority of businesses focus on establishing strong client relationships, which results in giving less importance to vendor relationships. When vendors are considered as clients, managing vendor relationships gains importance.
Vendor relationship management is a process that focuses on improving and strengthening relationships with third-party vendors or suppliers. Whether the vendor is a small, independent contractor or a multi-year business partner, each vendor plays a crucial role in the success of an organization. Vendor-client relationship management lays the foundation for the success of an organization.
Vendor relationship management as defined by Gartner – A discipline that enables organizations to control costs, drive service excellence, and mitigate the risks, to gain greater value from vendors throughout the deal cycle.
Companies cannot handle all their businesses in-house and independently. From time to time, they depend on vendors to reach their goals. Although interactions with vendors may seem purely transactional, developing strong vendor management strategies will positively impact your organization and set the foundation for future supplier relationships. As with all relationships, vendor relationship management is based on practices and strategies designed for a healthy working relationship.
Managing vendors may seem like a typical business operation. Still, as we get into the details of vendor management, we realize that it takes much more than timely payments to build strong vendor relationships. When organizations focus on nurturing and caring for the professional relationship between their company and suppliers, they enjoy mutual benefits. Vendors that are managed efficiently feel valued and improve the company’s stature.
Vendors versus Suppliers
Vendors and suppliers are terms that are used interchangeably. Do they mean the same thing? Vendors may be resellers of a product, like software, developed or produced by a SaaS supplier. Suppliers on the other hand are the first link in the supply chain, while vendors are the last. A supplier management program encompasses the segmentation of different types of suppliers (and vendors). So, when you have a solid supplier management system in place, your vendor management process will probably be stellar too.
A supplier is a business that creates goods or services intended to be sold. A vendor on the other hand is an exclusive seller of products and services, meaning vendors need not be responsible for creating the offering. A supplier can serve as a vendor by engaging in direct sales to the public, or by operating through a network of external vendors and resellers to bring products to market.
Importance of Vendor Relationship Management
Whether they are short-term or long-term, vendor relations are critical for any organization. At the outset, it makes everyone’s lives easier when we have smooth relationships. But, when we look deeper, the intricacies of vendor relationships affect nearly every level of the supply chain. Let us explore the importance of vendor relationship management.
1. Competitive pricing
Strategic vendor relationships can lead to better pricing for several reasons, which include higher order volume with an exclusively created list of preferred vendors. Having a list of curated vendors provides better total costs and terms from vendors that know the value of your business.
2. Improved customer service
Strategic vendor relationships provide businesses an avenue to turn to when issues arise. Practicing healthy vendor relationships strengthens the relationship between suppliers and buyers. Vendors too are willing to go the extra mile in the effort to keep their contracts alive.
3. Improved product quality
By doing recurring business with known vendors, the quality of products or services received is consistent. When vendor relationships are transactional, they run the risk of issues like sub-par replacements for out-of-stock items, an increased potential for damages during shipment, and increased difficulty in resolving issues.
4. Performance metrics
Vendor performance needs to be measured over time to identify trends and shifts in service relationships. When vendor relationships are transactional, it is harder to measure vendor performance. The resolution of issues related to the fulfillment of goods and services may also vary significantly from one transaction to the next. Consistent partnerships are easier to manage and measure. A robust vendor relationship management system makes it easy and simple to measure vendor performance.
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Establishing Vendor Management Systems
How to Manage Vendors?
When done right, vendor management follows a predictable pattern for selection, negotiation, contractual agreement, performance measurement, and renewal or offboarding. The vendor management strategy depends mainly on the pricing and service they provide during the contract period. Let us take a look at the stages in vendor relationship management.
Selection of the vendor
Choosing the right vendor prevents issues in the long run, so building a thorough and well-planned selection process is key. Shortlisting select vendors is the most effective way to start the vendor selection process. Vendors are chosen based on their proposed value and services. Consider the following points while shortlisting vendors –
- Pricing
- Customer reviews
- Product and service offerings
- Reputation
Scrutiny of vendors helps teams consider all options before making the final selection. They instill confidence in key decision-makers and maximize success with the chosen vendor.
Negotiation
Once the vendor has been identified, a contract has to be signed. The negotiation plan must define clear criteria that emphasize a satisfying outcome for both parties. From the buyer’s perspective, consider points such as timelines, pricing structure, and other contractual details. Develop a sound strategy for understanding the opportunities and limitations in the vendor relationship.
During contract negotiations, it is important to have open communication and trust-building to give the relationship the right start. Effective negotiation allows companies to reach an agreement that benefits both parties without compromising on value or revenue.
Onboarding
Once the contract negotiations are complete, vendor onboarding begins. A streamlined onboarding process ensures that vendors are set up correctly in the company’s systems to facilitate the submission of orders, tracking of fulfillments, and organizing payments. Proper onboarding is critical for efficient vendor relationship management. Assign a procurement or finance team stakeholder to act as the point of contact for the onboarding process.
Purchasing and fulfillment
The working relationship between the buyer and supplier is important for building a successful vendor management process. Buyers need to clearly define their expectations for the supplier, such as quality standards, delivery timelines, payment terms, and communication guidelines. Breakdowns in communication lead to disputes over products or services not being delivered on time or meeting the standards agreed upon. Effective vendor relationship management ensures that these issues are identified early on so that they do not escalate into larger issues.
Performance evaluation
Tools like benchmarking and vendor scorecards are used by procurement and finance teams for completing performance evaluations. Benchmarking helps buyers compare the pricing performance of their suppliers against industry standards. Vendor scorecards provide teams with a category to rate each vendor based on different criteria. These scorecards can be used to identify improvement areas in the procurement process. Performance reviews also ensure that both parties meet contractual expectations. Proactive monitoring of business relationships creates opportunities to measure supplier’s services and make adjustments wherever necessary.
Contract renewal
The best vendor relationships will benefit from refinement. When the contract ends, revaluation of terms like pricing, payment, delivery, and compliance, ensures that the relationship remains beneficial and competitive. Vendor management during the renewal process helps identify improvements needed for successful outcomes. When open communication is maintained throughout the renewal process, buyers can maintain productive, cooperative, relationships with vendors for years to come.
Offboarding
Both vendor onboarding and offboarding processes are equally important for vendor relationship management. The offboarding process ensures that organizations document the process, retain learnings from vendor relationships, and verify that the vendor follows post-contractual obligations, such as data deletion or storage. Streamlined offboarding also identifies gaps or areas for improvement in the overall supplier management strategy. It enables organizations to protect themselves while maintaining a positive relationship with a vendor, who might be needed in the future.
Vendor Management Strategies
Irrespective of whether you are building vendor relationships from scratch or looking to fine-tune existing approaches, there are a variety of ways available to nurture vendor relationships. Each company has its supply chain methods, so the vendor management strategy must be aligned with the supply chain strategy for achieving organizational goals. Here are the points to focus on while defining the vendor management strategy.
1. Risk management
When organizations partner with a vendor, there are inherent risks involved. Analytical tools can help in monitoring information on the financial and legal aspects of current vendors. The team incharge of managing vendor relationship management can utilize this information for assessing potential risks and compliance issues before the contract is signed. Despite having a well-crafted vendor agreement, uncertainties within the supply chain may lead to various risks. Common risks are price fluctuations and changes in demand schedules. Having a positive vendor relationship and working together to address these risks is a solid risk management strategy.
2. Choosing vendors
The selection of vendors is an important aspect of vendor relationship management. In the procurement process, ask questions that are relevant to your organization’s goals. For example: Whether or not the vendor can work within the compliance requirements; Whether they can provide products and services for a specific or ongoing period; or whether an organization can associate and communicate regularly with a vendor. This is the basis for strong and positive supplier relationship management.
Current vendors in your organization may be able to suggest compatible products for your requirements. You can also consider asking them for referrals. Strategic vendors need to be consistent with the company’s ethics and work style, as this would set the stage for a productive, long-term relationship together.
3. Set expectations right
It is better to set clear expectations with vendors at the start of the relationship. This keeps miscommunications and misunderstandings at bay while managing vendors. For example, organizations may need a vendor to upload a certain level of cyber security, as required by the organization. Failure to meet these levels or any deviations from these levels may result in termination of the contract. You need to ensure that the expectations are set at the beginning of the onboarding process. Clarifying and understanding mutual expectations, business goals, and systems are crucial for mutually satisfactory relationships.
4. Frequent communication
The higher the frequency of communication between buyers and vendors, the more effective will be the collaboration between vendors. Prioritizing communication with stakeholders and ensuring that the communication is consistent throughout the relationship is crucial. Buyers need to be supportive and understanding of the vendors and their services because they too have goals, deadlines, and challenges. Having an automated vendor management workflow can also help in overcoming the challenges.
5. Create a win-win partnership
Businesses must always bear in mind that vendors run a business and they have to make profits to survive. Constantly negotiating for the lowest possible prices may harm the vendor relationship. You should consider the best value procurement approach for a mutually beneficial relationship. Communicate to the vendor that you value their work by negotiating for a fair price that benefits both parties. Focusing on building a win-win partnership leads to long-term benefits for your organization and vendors.
6. Tracking Metrics and KPIs
Successful organizations have a well-established and detailed system for evaluating vendor performance. Through the relationship with vendors, companies are required to provide positive feedback and room for improvement regarding vendor performance based on several metrics. Methods for tracking metrics include scorecards, vendor performance, and vendor security ratings. Another strategy is to ask vendors to submit a reverse scorecard, which allows them to provide your organization with constructive feedback from their side of the partnership, by acknowledging strengths and growth areas.
Strategic vendor relationships can lead to better pricing for several reasons. Implementing these vendor strategies can not only strengthen vendor relationships but also help build mutually beneficial partnerships.
Challenges in Vendor Relationship Management
In reality, not all vendor relationships go as planned. Several roadblocks come in the way of managing vendor relations. An integral part of managing vendor relationships is to overcome these issues and adapt to evolving circumstances. Some of the common challenges faced in vendor relationship management are listed below.
Communication
Misunderstandings or miscommunications between buyers and vendors are common in the absence of streamlined vendor relationship management systems. It is important to communicate with the vendor at each step of the process. Seamless communication for every transaction ensures that both parties are in agreement at every step of the process. Any confusion or misunderstanding can be avoided with clear communication channels.
Data unavailability
For a successful procurement process, especially one that requires prompt and accurate payments to be done, you need to apprise several teams with details on vendor operations. Siloed procurement tasks and poorly centralized data stores make it infinitely difficult to keep multiple teams on the same page.
Compliance issues
Non-compliance is another common issue faced in vendor management. Effective vendor relationships stem from setting clear and consistent expectations. When vendors repeatedly fail to meet quality standards or SLAs, the relationship can quickly sour. Businesses must set clear SLAs and communicate the same to vendors to avoid any compliance issues that may arise throughout the journey.
Ignorance of process
When process performance data is not accurately tracked, the procurement team finds it difficult to identify the potential improvements or resolve any issues that arise during run time. Issues like delivery errors or process slowdowns need to be proactively handled so that they do not affect process performance. To do this, the entire team requires a complete understanding of the process. Comprehensive process knowledge helps assess individual vendor performance, especially when conclusive records are not available.
Best Practices in Vendor Relationship Management
We have listed out supplier relationship management best practices that can be followed to improve the efficiency of vendor relationship management.
1. Make data-driven decisions
Procurement operations that are based on guesswork and assumptions are bound to weaken vendor relationships and cause problems that cascade throughout the organization. As a sharp contrast, purchase decisions that are based on hard facts, help in identifying challenges accurately and plan operations efficiently. Data-driven decisions enable teams to fulfill outstanding obligations on time and within budget.
2. Choose the right vendor
It is not always that the cheapest vendor is the best one. While choosing the vendor, the focus should be more on the quality of the purchased materials and the track record of the vendor rather than the price they are quoting. A vendor chosen based on such criteria can match your process requirements more accurately. Businesses must consider the entire relationship holistically to build long-standing vendor relationships.
3. Establish clearly defined processes
Before going ahead with your purchase, you should lay out all the relevant process details – right from data formats to payment terms to responsibilities and workflows. When all these factors are agreed upon at the beginning, there is very little scope for confusion or miscommunication.
4. Distribute the risks
Sharing or distributing the risks associated with vendor management mitigates the uncertainty associated with supply chains. Vendor-associated risks like price volatility, demand fluctuations, etc, need to be taken care of by a well-crafted vendor contract.
5. Performance evaluation
One of the most effective vendor management best practices is to measure the performance of vendors. Organizations with strong vendor relationships often have an elaborate system to measure vendor performance. Some common methods to evaluate vendor performance include – vendor scorecards, vendor ratings, and vendor performance reviews. Vendor performance evaluation also holds them accountable for their performance.
6. Automation
Vendor Relationship Management entails several repetitive and mundane tasks that are time-consuming and data-intensive. Automating such tasks is a great way to streamline vendor relationship management. A no-code enterprise workflow automation solution like Cflow can automate and streamline vendor relationship management. Visual form builder, real-time reporting and analytics, third-party integrations, and document manager, are some of the features that Cflow brings to vendor relationship management.
Final thoughts
Successful business operations lean towards successful vendor relationship management. When vendor relations are managed efficiently, communication gaps are sealed and the power of collaboration is leveraged to derive more value out of vendor relationships. A workflow automation solution like Cflow can transform vendor relationship management by automating tedious tasks like vendor onboarding, vendor performance management, and more. Up your vendor management strategies several notches with Cflow. Take Cflow for a test drive by signing up for the 14-day free trial.
FAQs
Is vendor relationship management the same as vendor risk management?
No! Vendor risk management is a discipline that focuses on pinpointing and mitigating risks associated with vendors. Vendor relationship management on the other hand is the process that enables your company to control costs, improve service, and mitigate risks.
Can you automate vendor relationship management?
Yes. Repetitive and data-intensive tasks like vendor onboarding, comparing vendors, and offboarding vendors that do not require human intelligence can be automated.
Can Cflow automate vendor relationship management?
The no-code workflow builder in Cflow can easily and quickly automate tedious processes in vendor relationship management.
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