Building Effective Vendor Relationships

Proper vendor management is essential to guarantee continuous business operation.

According to a recent survey by Deloitte, it was found that 9 out of 10 retailers experienced some type of disruption with regards to their vendor relationships in the last three years. Of those, almost a third experienced a major disruption in their supply chain. One in 10 retailers had to deal with a complete vendor failure.

In other words, your procurement strategy won't be much of a success without effective vendor management.

The efficiency of your entire business will suffer if you don't manage your vendor relationships efficiently. But with the right strategy in place, you will be able to lower costs and glean important market information that will help you improve your supply chain, get an edge over the competition, and run your company more effectively.

In this article, we will consider vendor relationship management, as well as a series of vendor management best practices that you should consider when evaluating and improving your vendor relationships.

What is vendor relationship management?

There is often a confusion between the terms vendor information management and vendor relationship management. Although these processes are connected and can be managed with the same software, there are a couple of fundamental differences between them.

Vendor information management is all about vendor data—the capture, storage, updating and analysing of vendor information.

In contrast, vendor relationship management (VRM) is mostly focused on building a system of effective, seamless communication and collaboration with your vendors. In this way, a productive and healthy partnership between the buyer and vendor can be established.

The goal of VRM is to create deep, long lasting relationships with your vendors—collaborations that are beneficial to both parties. The aim is vendor relationships built on trust.

Effective vendor relationships have a number of important benefits. Firstly, in the long run the overall quality of the goods and services you will receive from vendors will be better.

Furthermore, the total cost of ownership will be higher. Because of the culture of collaboration that it established, both partners work together to find innovative solutions to your customers' problems and to fill strategic gaps in the market.

Effective VRM will also result in better data sharing and seamless flow of information—which will improve the efficiency of your partnership as a whole.

Please don't get the idea that VRM is restricted to maintaining a current database on everything related to vendors, or simply creating a system that facilitates regular communication. VRM goes much deeper. Its ultimate aim is to allow you to know your vendors better.

You want a system where vendors become active partners in your organisation—where your success means their success.

Besides managing vendor information, vendor management must also include all the processes involved in initiating and maintaining good vendor relationships. This includes a streamlined vendor onboarding process, performance reviews that are accurate and transparent, as well as effective risk mitigation systems.

All of these processes can benefit tremendously from automation and digitization. Relying on manual tools opens up your organisation to disruptions and errors. Companies that still rely on paper forms and spreadsheets for their vendor management will probably have to deal with lots of issues like payment delays, lost opportunities for discounts and savings, and overall strained relationships with vendors.

The importance of good vendor relationships

Procurement is impossible without third-party vendors. They are the heart of any procurement efforts. This is why it's remarkable that so many organisations fail to realise how important strong vendor relationships are to their overall business success. When you neglect your vendors, your business will suffer.

Maintaining good relationships with vendors might not have been such a big deal in the days when procurement was simply an administrative function—when the goal was simply to acquire the goods and services your company needed to operate.

Nowadays, procurement teams play a much more important function in a business. In many organisations, vendors have been elevated to co-creator status.  You must build strong partnerships with your vendors—partnerships where you collaborate to reach mutually beneficial goals.

What it also means is that managing spend isn't as simple as negotiating good vendor contracts. Outdated management practices won’t solve issues related to your existing procurement processes.

In short, the success of your business relies heavily on maintaining strong vendor relationships. You need to know the status of your vendor base at all times to nurture your vendor relationships and maintain productivity. This gives you a much better chance that vendors will honour their vendor agreements.

How do you manage vendor relationships?

The key to maintaining good vendor relationships is to manage it with a strong emphasis on collaboration and visibility between the parties.

You need to work together with your vendors to ascertain an accurate picture of how the relationship is doing and how the vendors are performing. In this way, you will have solid grounds to make fact-based decisions with regards to remedial action, contract renewal, and consolidation.

When the vendor relationship is managed with manual processes, visibility in the relationship will be low. This is because the relevant information with regards to vendor performance is scattered across your organisation. What else do you expect when snippets of information are recorded by different people using different forms and spreadsheets, and are then stored in different locations in your company? The result is that your ability to improve your vendor relationships and business efficiency is impaired.

To aid this process, we will look at a couple vendor relationship management best practices. When you implement these best practices, you will be able to lower costs and increase the overall productivity and efficiency of your vendor relationships. There are three best practices that we will consider in this article: measuring performance, sharing risk, and building trust.

1. Measure performance

The better you measure vendor performance, the better those vendor relationships are going to fare.

Many organisations have incorporated elaborate schemes to measure vendor performance—including scorecards, which are processed into vendor ratings and then aggregated into performance reviews.

This might seem like a lot of work, but it will be highly beneficial to your organisation in the long run. When vendors are held accountable for performing up to par, everyone wins.

2. Share risks

There are various risk factors when running your business through an extensive supply chain. Uncertainty in the market can lead to demand fluctuations and resultant price volatility.

This is why it's highly beneficial to share risk with your vendors. When risk-sharing is incorporated in your vendor contracts, it will reduce uncertainty and maximise outcomes.

3. Build trust

As with any other relationships, the strength of your vendor relationships will be determined by the level of trust between you. When vendors feel that they are invested in the relationship—both financially and emotionally—both the buyer and vendor will work together to make your business successful. When vendors see that you're also invested in their success, you will be able to win over their trust in record time.

Three winning strategies

As you might have gathered from the rest of the article, building effective vendor relationships requires planning and effort. To help you on this journey, here are three VRM strategies that will help you get the most value out of every vendor relationship:

1. Good communication

Ineffective communication is the root cause of most failures in business. When you are unable to relay or accept important information from your vendors, your vendor management strategy is already on shaky ground.

The key is to communicate with your vendors clearly and often. Vendors have to be aware of what you require from them at all times. You must also solicit feedback from vendors to ensure that they have the capacity to meet your requirements. If not, there will be unmet expectations and breaches of trust.

2. Build partnerships

Many businesses enter into transactional relationships with their vendors. In other words, they send orders to the vendor and then receive goods or services in return. The result is relationships that effectively terminate once an order has been fulfilled.

If you want to increase the efficiency of your vendor management, you have to move beyond transactional relationships to build strategic partnerships with your vendors.

This starts with treating suppliers as partners—partners that are valued and important to your organisation. Instead of sending a vendor a list of KPIs that they have to fulfil, bring them into the key decision making process. Work together to define relationship objectives. Ensure that everyone is on the same page and know what is required from them. Make your objectives clear to everyone.

There are many added benefits to this approach. For one, you will gain access to the expertise of your vendors. And because of the higher level of trust that has been established between you, you will get preferential treatment and gain access to privileged market information.

3. Make it worth their while

It isn't always the best strategy to pursue short-term cost savings. This shortsightedness has a tendency of ending up costing a whole lot more than what you saved in the short term. These short term cost savings also have a tendency to negatively impact product quality.

Which means you shouldn't try to squeeze vendors for every last cent in savings. You have to invest time in getting to know and understand how your vendor operates.

Negotiate with vendors on the basis of good faith. Don't strong-arm them to get the most benefit. You should focus on setting objectives for the partnership that are also favourable to them. When your vendor makes a profit it strengthens your business.

Conclusion

Effective vendor management is crucial for the smooth running of any business. With effective vendor management, you will avoid unnecessary vendor risk, while reaping the maximum benefit from your vendor relationships.

When you work with vendors, you want to manage the relationship in a structured and transparent way—from the moment you first make contact with a potential vendor, up to the point of contract termination. The key is to place your vendors at the heart of your procurement workflows. You need to integrate your vendors into your procurement strategy.

You do this by building effective partnerships with your vendors. Formally  recognize their importance and strive towards achieving win-win outcomes in every interaction you have with them.

To build strong, long-lasting, and profitable relationships with your vendors, you need to steward every interaction with your vendors. Every time you communicate with a vendor, you are engaging in vendor management—whether you realise it or not. Every vendor interaction must be beneficial to both parties and promote both your business objectives. In this way you will achieve the best possible outcome for your organisation.

With the right technology tools, you will be able to incorporate sound vendor management practices in the running of your business. The software will streamline all aspects of effective vendor management, from onboarding new vendors, to managing orders and tracking their performance as you go through your business day.