What is a Vendor Management System (VMS)?

Depending on the size and nature of your organisation, you will use several vendors in the day-to-day running of your business. For example, you will probably need several suppliers to provide you with sellable goods.

You might also partner with technology vendors, service providers like cleaners or marketing firms, or a range of technical consultants to make your business work. This is where vendor management systems (VMS) come into play. A VMS is dedicated technology that manages the various stages of your relationships with these vendors.

So what exactly is vendor management? And why is it important for your company to consider using dedicated technology to handle your vendor management functions?

What is vendor management?

Vendor management is all of the processes and systems that a company uses to manage their suppliers—often called the vendors of an organisation.These vendors provide the goods and services that enable you to run your company.

Vendor management is an umbrella term for the range of activities involved in initiating and developing relationships with these vendors.

Vendors can be grouped according to the size and scope of their operations. Some function as sole traders, while others are massive international conglomerates with the ability to leverage global supply chains  to offer better service at lower costs.

To manage a complex network of vendors, you need the right vendor management strategy. And the more suppliers and vendors you incorporate into your day-to-day operations, the greater the need for the right technology and processes  to properly manage them.

What is a vendor management strategy?

A vendor management strategy encompasses a range of functions. Simply put, it is everything involved in initiating and maintaining relationships with the third parties that help you run your business.

This would include the management of the  communication between yourself and your vendors. For example, you need to have up-to-date and correct documentation on all your vendors

You would also need to review the performance of your vendors on a continuing basis. You will also have to identify and manage the risk involved with relying on vendors for key aspects of your business.

Visibility into vendor activity is crucial. The more vendors you use, the more difficult it becomes to have proper insight into their activity. More vendors in your network also makes vendor risk management and mitigation difficult.

Not all vendors should be treated equally, and a proper vendor management strategy will allow you to do that. If your vendors are scattered across a wide geographical area or if you work with international vendors, it becomes difficult to keep track of their activity.

In fact, the more complex the geographical footprint of your network of vendors, the more difficult it becomes to manage the different stages of your vendor relationships.

The right vendor man-agent strategy is crucial to get the most bang for the buck from each vendor. You want to ensure that each vendor relationship delivers on the original promises when you signed a contract with them.

An effective vendor management strategy should include the following:

• a process to create specific goals for each vendor that are clearly quantifiable and understood
• a process to track key performance indicators (KPIs) for each vendor
• processes to initiate and maintain the relationship with your vendors that are efficient and conducive to your goals.

Why does your business need a VMS?

When you use VMS software to handle your vendor management functions, you have the right tools to ensure that all your vendors perform adequately and meet the needs of your organisation.  

With the right technology and systems in place, it becomes easy to communicate with vendors and third-parties. Often with the right kind of feedback, vendors will be able to perform better to your requirements.

It will also make it easier for you to hold your vendors accountable and ensure that they keep their side of the arrangement. In this way, you will build strong, effective relationships with your vendors—relationships that will ensure that your business runs smoothly.

VMS software will also handle the compliance side of vendor relationships. The technology will ensure that all vendors are compliant to governmental regulations, company policies and other obligations.

If you source products and services from global supply chains, you need to seriously consider adopting a VMS to handle your vendor relationships.

Supply chains with suppliers and vendors that operate internationally are by nature complex and difficult to manage. If you don't have the right tools to manage the relationship with these vendors, you're always at  risk of serious disruption to your business operations somewhere down the line.

The top 10 benefits of using  a VMS

Here is a list of the top 10  benefits of using a VMS to handle the vendor management side of your business:

1. Manage the external workforce

Many companies have an army of freelancers, independent contractors, consulting firms, and other vendors working for them.In fact, it has become commonplace for your labour force to include many workers who do not directly get a pay-check from your company.

These can all be lumped together under a single term: the external workforce.

The external workforce has become somewhat of a buzzword in modern companies—especially in the United States. It's estimated that, on average, almost half of the money spent on wages and compensation in America  goes towards the external workforce.

That does not mean that it's an easy task keeping track of external workers, independent contractors and temp workers. You need specific technology solutions to handle this influx of fresh talent into your company.

Traditional HR services are not able to fully take advantage of external workforce revolution. They are just not equipped to handle the outsourcing of core business functions to outside vendors.

This is why you need a VMS to manage the external workforce. There is a significant advantage to bringing the management of all these resources under one umbrella. This is especially true if you want to reap the main benefits of the external workforce: to increase the agility of your organisation and to save time.

2. Select the right vendors

A VMS will help you select the right vendors to fulfil particular needs in your business. The technology will help you meet the specific business goals that added vendors are meant to fulfil—such as saving money, providing better goods and services to customers, or improving your order fulfilment process.

A VMS can provide the transparency and insight your procurement management team needs to make strategic vendor acquisition decisions.

The goal should be to engage competent vendors with the  capacity to fulfil your business needs—while also taking care of the necessary compliance requirements. This will improve the total efficiency of your vendor selection process.

With the right system in place, you will also be able to identify any over-reliance on a single vendor for mission-critical goods and services in your company. This will allow you to source alternative vendors or make contingency arrangements should anything go wrong with those vendors.

3. Streamline vendor onboarding

With a VMS, the process of onboarding vendors becomes easier and more time efficient. This is because all of these processes are handled through a centralised vendor portal.

There are several benefits to such a setup. For one, the system will store all the appropriate documentation and information to register approved suppliers and make it available to all relevant stakeholders. Not only does a VMS improve the whole onboarding process, it will make vendors more inclined to do business with you. This is because the vendor is cleared for business and to get paid for their goods and services in record time.

The VMS streamlines the parts of the business relationship that is most important to your vendors—invoicing, reimbursing their expenses, and issuing payment.

4. Monitor vendor performance

As you do business together, the VMS will monitor vendor performance against specific key performance indicators (KPIs). These might include their overall level of service, as well as the quality and volume of the goods they provided.

This ensures that all vendors perform adequately as stipulated in the contracts you negotiated with them when you initiated the relationship.

5. Ensure vendor compliance

As a business, you are responsible for not only maintaining the compliance of your own organisation, but that all third-parties are strictly compliant with the relevant laws and regulations.

Any business is faced with several compliance issues on a day-to-day basis. The VMS aids this process by maintaining all relevant documents in one place, and publishing alerts when certain documentation needs to be renewed.

In this way, the VMS ensures that all vendors operate within the bounds of the law.

6. Maximise the value of  vendor relationships

As your business grows, the number of contracts and vendors that you have to manage will increase rapidly. Which makes it more difficult getting the most value out of each vendor relationship.  

With a VMS, you can ensure that you always get the most value from your suppliers while keeping costs down. A VMS manages vendors from a centralised hub, using a standardised set of procedures. This makes it easier to get the optimal value from each vendor agreement.

7. Manage vendor risk

A VMS will automatically monitor vendors for specific predetermined risks. These risks might include lawsuits, regulation breaches, or any of a number of potential IT security breaches.

In this way, it becomes much simpler to assess and mitigate vendor risk and prevent unnecessary disruptions to your supply chain.

8. Reduce supply chain disruptions

As the global supply chain gets more complex and international risks seem to multiply, it becomes more crucial to implement a robust vendor management strategy. A VMS can actively monitor vendors and initiate contingency plans when anything goes wrong with a specific vendor.

This lowers the risk of business operations interrupted due to a problem with suppliers. Which means you're more likely to receive the correct goods and services from your vendors at all times and ensure business continuity.

9. Build strong relationships with your vendors

With a VMS, you are able to build stronger and more effective relationships with your vendors. This is because the software integrates several vendor relationship functions into a single interface.

When you manage your vendors properly, you become an effective business partner to them. Which makes it easier to deliver on your side of the bargain with your vendors.

When you meet  their expectations and requirements, it becomes easier to build strong, long-lasting business relationships with them. Which opens the door to renegotiate better rates with your vendors down the line.

10. Leverage a large vendor network

Why do you use vendors in your business? There are many reasons, but probably one of the most compelling is the ability to put together an ecosystem of talent. You will then be able to draw from this pool of talent when you want to solve a specific problem in your business, or to harness a specific opportunity.

Because of the superior management capabilities of a VMS over traditional, manual processes, you are able to manage a much larger pool of vendors. Which means it becomes a lot simpler to make use of cost saving opportunities afforded by using a bigger network of vendors.

Conclusion

Proper vendor management can have a great impact on the profitability and efficiency of your business operations.

When you start using a VMS to handle your vendor management, you will always start your vendor relationships on the right foot. You will then  reap more benefit from your vendors through the course of their contracts, and extract more value from your existing network of vendors.

With a VMS handling your vendor management duties, you will be able to increase your business agility and scale your operations up or down as needed. Which means you will be able to respond to shifts in the market and threats from the competition at a moment's notice. You will also be able to respond to new opportunities in the market and keep up with the ever-changing trends.

In short, a VMS is crucial to the proper utilising of all your vendor resources. It will help you to source the right skills and goods, at the right time, at the right price to grow your business to the next level.