Creating an Effective Vendor Management Strategy

In recent surveys, it was found that at least half of all vendor relationships experience serious setbacks down the road. What would be the reason for this disheartening statistic?

The problem is always the same: a vendor management strategy that is underpowered, ill-conceived, and poorly executed.

Creating an effective management strategy isn't easy. For one thing, all vendors aren't alike. Each vendor has to be treated with a different strategy.

If your only goal is to lower cost, even the best formulated strategy won't turn your vendor management into a success. You have to take all those factors that make each vendor relationship unique into account, as well as the financial status of each vendor.

The vendor management strategy needs to take into account the type, quantity, and frequency of the goods and services that each vendor provides.

The key to an effective vendor management system is to be adaptable and willing to try something new. Sometimes it's necessary to tackle an old problem in a fresh way—to let go of the stale practices of yesteryear and embrace the benefits that current technology and processes can provide for your business. This takes a collaborative effort to formulate a winning strategy that will benefit both partners.

In this article, we will look at creating an effective vendor management strategy—one that is both cost effective and efficient.

Different vendor management strategies

Even though different procurement managers around the world use different strategies for their vendor management, there are a couple of common denominators.

There are several ways that you can steward your vendor relationships to gain better results, both in terms of the speed of execution on vendor contracts, as well as the overall performance that you get out of your vendors.

In broad terms, there are five factors that must be included in any effective vendor management strategy:

1. Risk management

Vendor risk management is all about shoring up your supply chain by identifying risk vectors, assessing the amount of risk, and mitigating risk in order to minimise the impact it will have on your organisation.

What does this entail in practical terms? It means that vendors have to be monitored on an ongoing basis for risk. When a risk vector manifests itself, your organisation needs to have appropriate contingency plans waiting in the wings to address that risk.

Basically, there are three types of risk that you have to look out for: risk related to strategy, risk flowing from the implementation of that strategy, as well as performance risk.

A good example here is the Covid pandemic and the incredible strain it put on global supply chains. Retailers were faced with various factors related to supplier risk. One way manage this level of risk is to automate the various procurement processes that keep your business running.

2. Spend visibility

Controlling spending is an essential part of effective vendor management. You don't want uncontrolled indirect spends and hidden costs to cut into your profitability.

But tracking spending for all vendors is time-consuming and cumbersome if you rely on manual processes. These processes will benefit tremendously from automation.

When you automate your procurement processes, it becomes much easier to track day-to-day vendor spending. This added transparency is a great boon to effective vendor management.

3. Vendor segmentation

Another effective vendor management strategy is to  divide your vendors in different categories based on how they must be managed.

There are two vendor segmentation techniques that are commonly being used in the industry. The first is the Deloitte priority model. This is a simple process that is favoured by small and medium businesses that don't have to work with as many suppliers.

The Deloitte model groups vendors based on how critical they are to your daily business operations. Vendors are put into three groups: strategic vendors,  important vendors, and transactional vendors.

The other vendor segmentation technique is the  Kraljic Matrix method. This system is useful for companies that manage a large supplier base.

The Kraljic Matrix method evaluates each vendor based on two criteria: the risk involved in doing business with that vendor, as well as the profitability of doing business with them.

The vendors are then mapped out on a grid matrix  of four cells:

• vendors that are high risk and unprofitable
• vendors that are high risk and profitable
• vendors that are low risk and unprofitable
• vendors that are low risk and profitable

This makes it easier to analyse your line-up of vendors to formulate an effective procurement strategy.

4. Vendor collaboration

There is a global trend for CPOs to focus extensive effort on building a collaboration platform for their suppliers. The benefits of effective vendor collaboration are manifold. It strengthens vendor relationships and yields  real-world benefits such as lowered costs and better teamwork.

If you want to build an effective vendor collaboration platform, you won't be able to rely on normal communications channels like email or electronic messaging platforms. Even though you will be able to communicate with vendors in real-time using these channels, they do not nurture a collaborative environment. It's just too inefficient to stake your whole business on sending a bunch of emails.

What you need are dedicated—often cloud-based—digital tools that will streamline all your vendor management functions. Such a system will allow you to build a supplier network that is designed around enhancing collaboration and facilitating visibility.

5. Vendor performance management

It's important to keep close tabs on vendor performance, as it will help your get the most value out of your vendor relationships.

You have to implement robust processes for measuring vendor performance and then analysing the results. The benefits of a proactive approach is that you will lower costs and save money, and mitigate vendor risk.

To make this work, you have to put in place a system where all the relevant vendor information is stored in a centralised location that can be accessed from anywhere in your organisation.

This is where most organisations fall short. If you still use paper forms to capture vendor data, or enter the exact same information into a spreadsheet and a vendor management solution, it becomes very difficult to manage vendors with any level of efficiency.

What this means is that you need a better way to store vendor data—a way that makes the disparate information streams manageable.

It is precisely in this arena that digital procurement tools shine. These technology solutions come with built-in reporting capabilities that simplify the handling and management of vendor data.

The vendor management workflow

The entire vendor management process is ripe for automation. In fact, it's possible to automate most of your vendor management workflows.

Automation will cause your vendor interactions to run smoother. You will be able to take vendors through the different workflows faster and with more accuracy. Your team will also make fewer mistakes along the way.

Here are a couple of the regular vendor interactions that could benefit from automation:

1. Vendor selection process

When choosing vendors, companies usually don't just sign a contract with the first supplier they meet. Most companies work through lists of potential vendors and assess each one based on their associated benefits and risk profile before making their final selection.

This means that you have to approach potential vendors and get enough information from each to make a proper decision.

The type of information that you have to gather include getting answers to the following types of questions:

• Does the vendor understand the needs of your organisation?
• Are they willing/able to adapt to your particular requirements?
• How well is their line-up of products and services able to meet your needs?
• How much will their goods and services cost?
• What competitive edge are they able to provide above the competition.
• How well does their management style and culture fit with the ethos of your organisation?
• Do you foresee the possibility of a long-term vendor relationship with them?

When you automate the vendor selection process, everything is sped up. You can get to work faster, lower your time to market, and improve the efficiency of your vendor interactions.

2. Vendor onboarding process

When we talk about vendor onboarding, we mean all of the steps involved in integrating a new vendor with your internal systems so that you can start working together. It is the process of setting up a collaboration platform where the vendor integrates into your processes to get actual work done.

This process will colour your entire relationship going forward. When vendor onboarding goes to plan, the system opens up effective channels of communication and collaboration which will allow your business relationship to thrive.

An automated onboarding system will ease the process of gathering all of the information necessary for bringing a vendor into your system. This information includes such items as the appropriate certificates, company registration data, financials, as well as operational essential information like remittance details, shipping arrangements, as well as payment terms.

3. Invoice approvals

Another area of the vendor management process that can benefit tremendously from automation is the invoice approval process.

To approve an invoice for payment, the invoice must first be authenticated. There are several steps involved in this process—many of which can be automated.

When your vendor management is automated, the system can be set up to verify purchase requests, invoices and receipt orders before authorising the settlement of an invoice.

4. Vendor information management

Managing vendors means juggling a lot of information that is essential to communication and making strategic vendor-related decisions.

When all of this information is handled by a centralised depository, the system will automatically collect information regarding each vendor and keep all of that data up to date.

This eliminates a lot of manual work and makes all this valuable information available to the appropriate members of your team when they need it.

5. Vendor performance rating

To manage vendors effectively, it's important to keep tabs on their performance on a daily basis. You have to track their performance to assess how well they are fulfilling their contracts.

Without good vendor performance tracking, it's almost impossible to make quick and accurate strategic decisions with regards to your vendors.

When rating vendors, there are several key data points that have to be gathered and analysed: if their deliveries arrived on time, if their product quality was up to standard, and many other factors.

The system will automatically record these metrics and then process this flood of information into charts and automatically generated reports.

This will allow your decision makers to make informed choices without having to manually wrangle all of this data.

6. Avoid duplications

An automated system will allow you to avoid many of the most common mistakes where it comes to vendor management.

The system will prevent the onboarding of the same vendor more than once into your system—a common mistake that can wreak havoc with your data integrity and result in copious duplicates and confusion.

7. Supplier categorisation

Finally, an automated system will allow you to map suppliers onto a set of predetermined criteria which will ease the processes of evaluating vendors and making informed decisions.

Conclusion

In this article, we listed several of the benefits to automating your vendor management workflows. There are a couple of factors to take into consideration when automating your vendor management strategy:

• While doing the digital transformation of your vendor management, always keep track of your KPIs and ensure that vendors keep meeting your core business requirements.
• While going through the automation process, get continuous feedback from customers to ensure that it's truly improving their experience. The end goal should be to increase your business efficiency and improve customer satisfaction.
• Keep communicating with vendors to determine if your transition benefits their interests. Is your transitioning helping or hindering them to fulfil their obligations?
• While you're going through this shake up, don't lose track of what the competition is doing. Is the transition helping you to reach more customers, or are you limiting your reach?

Automating your vendor management isn't a once off process. This is something you have to do over a period of time, changing your strategy along the way as you get feedback from stakeholders and measure real-world results.

You have to measure how much the transformation is improving or hindering your organisation, to ensure that you end up with the optimal system for your needs and application.