Overview of Effective Vendor Management

There are several administrative and management functions associated with using vendors. There are contracts to draw up and sign as well as purchase orders that need to be sent out and managed.

Unfortunately, more often than not, companies still rely on manual processes to administer these vendor engagements. They don't make the transition to using dedicated vendor management systems (VMS) to handle all of these complex tasks.

Some of the more sophisticated VMS packages include features such as tracking the quality of a vendor's work, measuring the progress of a project against predetermined deliverables and milestones, ensuring data integrity and confidentiality, and finally to track the compliance status of all vendors including their certification status and training history.

In this article we will give an overview of what effective vendor management looks like. We will also look at the benefits of using a VMS to handle these management and administrative functions.

The vendor management lifecycle

Managing vendors is a  complex process, comprising several stages and activities. This can be thought of as a lifecycle that starts the moment a suitable vendor candidate is selected, until the point when the vendor is offboarded and their contract is terminated.

In broad terms, the lifecycle of a vendor relationship goes through eight stages:

● Firstly, a group of  vendors that would be suitable for a particular job is identified and contacted.

● The qualifications of each vendor candidate is determined. This includes an assessment of the risk profile of each vendor.

● The different vendors are evaluated for their suitability and the most promising candidate is selected.

● This vendor is then onboarded. A large part of the onboarding process is the gathering of key vendor data and inputting it into the system. This would include the company details and payment information.

● The vendor will then start delivering on their contract. Their performance will then be tracked on a continuing basis, with corrective steps taken when necessary when they go off target.

● A part of this process is managing the risk that comes with dealing with external suppliers and vendors.

● Along the way, the vendor relationship is managed in a proactive fashion to ensure that the company gets the most benefit from their vendor agreements.

● Finally, when it's decided that the vendor relationship has run its course, they are on offboarded.

Three phases of vendor lifecycle management

The vendor lifecycle can be split into three main phases, based on the status of the contract with the vendor.

Phase 1: Pre-contract

During the first phase of a vendor lifecycle, a need is identified within the company that needs to be fulfilled by an external supplier.

At this point, the help of a vendor is solicited by sending out notices to potential vendors describing the particular goods or services required.

These notices come in the form of Requests for Proposals (RFPs) or alternatively an Invitation to Bid (ITB). The goal is to make your needs known to qualified vendors that can compete for the contract on equal terms.

The potential vendors will then submit proposals that are processed and analysed for suitability.

From these submitted proposals, authorised procurement officers will draw up a shortlist of promising candidates that are taken through a qualification stage. This consists of a stringent due diligence process, where they are required to provide confidential financial information to prove their financial stability, health and capability to fulfil the contract.

The eligibility of vendor candidates are usually determined with the use of the following criteria:

● Whether they offer the lowest price.

● The technical responsiveness of each candidate.

● Whether their offer complies with the RFP or ITB.

● A scoring system based on  the trade-off between quality and cost.

Phase 2: Contract

This phase starts the moment a contract is negotiated and signed with a prospective vendor, until the time that the contract is cancelled at the termination of the vendor relationship.

During this entire time, stewarding the vendor information properly is an integral part of that vendor's lifecycle management.

During the vendor onboarding process, data is gathered from the vendor to create a data profile for them in your system. This data should be stored in a secure database that can be accessed by authorised stakeholders as the contract is being fulfilled.

That is why vendor performance has to be monitored on a constant basis to ensure that they consistently provide goods and services of the requisite quality. If there are any changes in their behaviour or performance, you will be able to perform corrective steps. This ensures that there are no disruptions in your supply chain.

A vendor's risk has to be managed closely, to ensure that all obligations stipulated in the contract are met, and vendor risk is mitigated.

Phase 3: Post-contract

The vendor relationship comes to an end at the conclusion of their vendor agreement.

It's a relatively simple matter to  terminate the contract of a low-value vendor. But when you have to end the agreement with a strategic, high-value vendor, things get quite a bit more complex.

Firstly, procurement officers have to verify that all outstanding contractual obligations have been met. Any pending obligations such as warranties and after-sales services have to be settled in a satisfactory manner, to ensure that everyone knows what's expected of them once the contract is terminated.

Then the actual offboarding process can begin. It's useful to employ a detailed onboarding checklist to guide this process.

Once the offboarding process has been completed, the vendor lifecycle has run its full course and is no longer managed.

Parts of the vendor management life cycle

Taking the above information into consideration, the vendor management life cycle can be divided into five, distinct phases:

Step 1: Vendor qualification

The vendor management process kicks in the moment potential vendor candidates are evaluated for their suitability.

You cannot engage the services of a vendor until you know with certainty that they can do the job you require or provide the goods you need to run your business.

Vendors must have the requisite expertise for the job, as well as the capacity to fulfil the contract.

That is why they have to go through a qualification process both at the initial phase of the vendor relationship (pre-qualification phase), as well as at the contract renewal phase (re-qualification phase).

Step 2: Vendor onboarding

Once a suitable vendor is selected, they have to go through an onboarding process to be integrated into the company's database.

At this stage, all of the pertinent company information is gathered and entered into the system. This information is then stored in a centralised repository and can be accessed and used as necessary.

Step 4: Ordering and delivery

At this point, instructions are sent out to the vendor in the form of purchase orders that describe the particulars and specifications of the order.

After a vendor has fulfilled the order, the goods and services they delivered are checked for quality and consistency to ensure that the vendor performed according to the specifications laid out in the purchase order.

Step 4: Vendor payment

Once the goods and services from a vendor have been received, an invoice has to be issued that matches exactly the issued purchase order.

This invoice has to be checked to ensure that everything is in order and then approved.

Any inconsistencies will result in the invoice being rejected for amendment by the vendor.

When the invoice has finally been approved, it is sent to the finances department and the payment is processed.

Step 5: Vendor offboarding

There comes a point in every vendor relationship where the contract is terminated. This is true even for long-term vendor relationships.

When a vendor agreement comes to an end, the vendor's records should also be removed from your financial and administrative systems.

This is necessary to avoid any costly breaches in compliance. You don't want to be held liable for the compliance breaches of a vendor that is no longer in your employ.

Activities involved in vendor management

There are several activities that come with the territory of managing vendors.

Some of these activities are performed by simply making a phone call to talk about the status of their project, or to discuss changes to your agreement.

Other activities require more effort, such as conducting a full quarterly review when all the stakeholders are brought into the same room to discuss the vendor's performance.

Vendor management activities include the following:

● The process of sourcing vendors, evaluating their suitability for a specific project, and then negotiating a vendor agreement.

● Going through the contract writing stages until a final agreement is put onto paper and signed.

● Tracking the progress of the contract based on Key Performance Indicators (KPIs) and then reporting the results.

● Going through the Quarterly Business Review process with a vendor.

● Negotiating business goals with a vendor, preferably ones that will benefit both parties.

● Ensuring the compliance and security rating of a vendor.

● Performing risk mitigation for a vendor.

● Keeping a record of key contacts with a vendor, especially escalation processes.

● Finally, resolving any disputes that may arise.

All of these activities can benefit tremendously from automation and the use of the right technology and processes to manage them effectively.

The benefits of using a VMS

As a company grows, there comes a point where they cannot manage all of their vendor agreements with manual systems anymore.

This is when they need to transition the business to using  a vendor management system (VMS). This is software that is specifically designed to manage the relationship with all third-party vendors and suppliers.

VMS technology provide several benefits, for example:

● The system will promote effective communication with vendors. Most systems provide a collaboration platform where vendors and retailers can share information, track the performance of a project, and coordinate actions.

● The VMS will also give you unprecedented visibility in vendor activity. Since the vendor relationship is managed by software, you will have access to real-time data as a vendor fulfils a purchase order.

● This makes it a simple matter to track vendor performance to ensure that they remain on track to fulfil their obligations.

● The system will also be able to track vendor compliance and flag potential breaches before they become a problem for the company. In this way you can ensure that all your vendors remain compliant with regulation and industry standards. This minimises  the risk of litigation and other legal complications while maintaining product and service quality.

● The VMS will improve the efficiency of your vendor management efforts, boosting productivity and lowering costs.

● The software will allow you to automate several vendor management processes at the same time—giving you the opportunity to  streamline and optimise your vendor interactions.

● Vendor relationships that are managed better will be stronger and more resilient. This creates productive partnerships that are long-lasting and profitable.

● The insights gleaned from the VMS will provide a constant stream of real-time, actionable data to your decision makers. This will help you make informed decisions with regards to your vendors and improve your overall vendor management strategy.

The impact of all of these benefits put together is immense. A VMS will improve the communication with vendors, which will stimulate and nurture collaboration. You will gain an effective means to monitor and control vendor performance. This will end up saving money and boosting efficiency. This will build strong vendor relationships.

Furthermore, the greater visibility provided by the VMS will allow you to make better decisions and ensure vendor compliance every step of the way.  

Conclusion

Managing your vendor lifecycle properly will deliver value across all aspects of your business.

There are several VMS solutions available in the market. Their main goal is to make it easier for companies to manage their vendor relationships effectively. But choosing the right VMS for your application isn't easy. There are many choices available on the market, and it's easy to feel overwhelmed with the cornucopia of choice.

When you have to select the best VMS—one that will meet your particular business needs and market conditions—you should look for a solution that is able to provide the following:

● The VMS should help you to identify opportunities to improve your vendor management, for example areas where work can be consolidated with a single vendor, or where it would be profitable to renegotiate specific vendor agreements.

● The VMS should help you to get the most value from each vendor agreement. The software should effectively track vendor performance and measure it against a set list of KPIs so that you will always meet your business goals.

● The VMS should help you to identify risks to supply, so that you can make timeous alternative arrangements and ensure the continuity and resilience of your supply chain.

● The VMS should handle the compliance verification and monitoring of your vendors. In this way, you will avoid unnecessary risk associated with a breach of industry standards or relevant legislation.

● The VMS should aid you in vendor risk management. As your vendor's performance is tracked on a continuous basis, any deviation from agreed terms can be corrected before it becomes a problem.

● Finally, the VMS should enable your business to innovate and grow by taking full advantage of all improvements made to your vendor's services and products.