How to Build an Effective Vendor Management Process

The vendor management process is a series of strategic and tactical activities that companies use to manage and collaborate with vendors. This includes setting objectives, establishing vendor selection criteria, negotiating contracts, strategizing for risk reduction, and controlling for cost and delivery. 

Gerard Blokdyk, CEO of The Art of Service and author of Effective Vendor Management: A Complete Guide, says siloed purchasing departments are a remnant of the past. “It's imperative to build a disciplined vendor management process that integrates with overall corporate goals,” says Blokdyk. 

If a strategic approach to managing suppliers is new to you and your team, learn more with “The Definitive Guide to Vendor Management.”

Depending on the size of your organization, many different people will participate in the vendor management process. In general, the users are the vendor manager, the vendor management team, and the vendors themselves.

Vendor management users include the following:

• Enterprise-Level Management: The company uses key performance indicators (KPIs) to define and monitor its goals. Key vendors help achieve those goals by supplying products and services with the lowest possible risk level. The C-suite is a strategically oriented organization that will track critical vendor data provided by the vendor management or purchasing team to ensure continuous, smooth, and effective unit maintenance.
• Vendor Managers: The team leaders help create the process and programs, as well as ensure that vendor selection, oversight, execution, and delivery follow the process standards.
• Vendor Management Team: The team should have a thorough understanding and grounding in the strategy behind the vendor management process, as well as any specific tactics. From there, they can carry them through from the beginning to the end of vendor engagements.
• Vendors: A transparent vendor management process establishes relationship requirements, when vendors can expect intervention — or, potentially, rewards for positive actions, such as early deliveries, cost savings, ideas for innovation, or ways to improve existing systems. 

In essence, every department in a company should care about vendor performance, since failure in a supply chain can cause anything from minor problems (e.g., a delay in a production line due to late materials) to significant issues (e.g., those that can damage sales, goodwill, and reputation).

A strong vendor management process should focus on company objectives and gain C-suite buy-in. The process itself encompasses all the steps from vendor selection through the end of the relationship, with risk mitigation at top of mind. 

Vendor management enables organizations to gain increased value from their vendors throughout the relationship lifecycle. The vendor management process defines the specific practices you put into action.

The overall process drivers of vendor management include company-wide goals and KPIs, the ability to work collaboratively with key vendors, and dedication to continuous improvement.

The many benefits of the vendor management process fall into six general categories: value generation, compliance and risk reduction, improved performance, effectiveness, and innovation.

The vendor management process enables companies to do the following:

1. Drive Strategic Objectives: When you manage vendor relationships as collaborative partnerships based on high-level organizational requirements, you enable competitive advantage, such as innovation, increased capacity, knowledge sharing, and complementary offerings.
2. Minimize Risk: Relying on vendors to deliver goods and services saves money and time and staffing costs, but it also comes with risk. Design your vendor management process to mitigate operational, compliance, financial, and other threats to your company — it will be easier when you select and oversee vendors from that perspective.
3. Set Appropriate Evaluation and Ongoing Review Criteria: All aspects of vendor expectations, such as risk mitigation, pricing, turnaround times, and quality standards, should be decided upon based on a framework informed by needs and data analysis.
4. Develop Contract Negotiation Strategies: Strong negotiation with vendors result from a thoughtful analysis that supports an overall company strategy. With critical vendors, in particular, you want to set up a win-win situation that fosters collaboration.
5. Forge Productive Relationships: When you work cooperatively with vendors, you create more stable and effective relationships for the longer term. Changing vendors costs time and money — it's better to “get it right” from the beginning of the relationship. This relationship-driven approach is different from the traditional purchasing office approach, which often focuses on cutting costs and stepping up delivery times and can lead to severed relationships rather than cooperation.
6. Define Roles and Responsibilities: When you offer clarity about who is in charge of different aspects of vendor relationships and communication channels, you create overall efficiency.

Vendor management process best practices and tips generally fall into several groups: setting a framework, practicing term communications, collecting data, being risk-aware, and focusing on collaboration and long-term relationships.

• Use Quantitative Data Collection Approaches: “Allow your organization flexibility to use a quantitative approach to make significant decisions,” suggests Blokdyk. “For example, complex products hold millions of computer code lines — does the vendor have automated code scanning environments to automatically test for coding practice as part of their R&D process? What processes does the vendor have to ensure that no customer data exists on disks or storage before landing in a return center? Let the data be your guide to make meaningful improvements.”
• Rely on Your Framework: “Have mechanisms and vendor management processes in place for your organization that encourage choice and vendor neutrality,” Blokdyk says. “Don’t rely on a ‘who you know’ or ‘who is cheapest’ approach.”
• Strive for Long-Term Relationships: Working with vendors long-term saves time and money, but remain vigilant. Collect data to confirm that you’ve made the right choice, and if you see a glitch, confer with your vendor and make course corrections as needed.
• Be Risk Aware: This aligns with the previous best practice: You simply cannot drop your guard. Ensure that you are alert to risks with your vendors and threats in the environment, like global shipping issues, data breaches, or other hazards.
• Compile Your Own Vendor Management Best Practices List: Use all the information and experience you gather to write your own best practices guide and include it in your onboarding manual.

For all the benefits the vendor management process brings to companies, there are also challenges to consider. They include ensuring compliance, upholding your reputation, building a process that provides transparency, maintaining adequate data storage, and having clarity around payment policies.

Here are some challenges to be aware of as you develop your vendor management process:

• Complex Vendor and Cyber Ecosystem: If you have hundreds (or even thousands) of vendors, it will be challenging to manage them all effectively. VMS can take out some of the pain of managing multiple contracts, deadlines, quality, compliance, and invoicing issues.
• Having the Right Internal Resources: Even with a VMS, many vendors or purchasing offices are understaffed to handle critical relationships.
• Top-Down Buy-in and Adherence: Vendor management as a strategic business practice is impossible without C-suite endorsement. 
• Multiple Risk Factors: No matter how sophisticated your vendor management practice might be, risks always exist. Risk mitigation and planning are a significant part of the vendor management job, and assessing risks need to be part of any relationship (before entering into it, during the relationship, and even after the vendor relationship ends).
• High Administrative Costs: Having the right people, processes, and tools in place come at a price. A VMS offers improved visibility and can improve efficiency and resource allocation. 
• Data Breaches: Data drives business, but there is always a possibility that the information will leak. As all business functions move online, guarding against cyberattacks is the top concern. 

The challenges of vendor management tend to grow along with your company’s size and the number of vendors you employ. Another category is IT vendor management, which has its own challenges and complications.

Below are some standard vendor management process terms to know:

• Vendor Management Office (VMO): This is a business unit dedicated to evaluating goods and services vendors that oversees interactions, ensures that buying activity aligns with corporate goals, and is responsible for long-term vendor relationships. As IT has become more critical to company competitiveness and functions, IT-dedicated VMOs have become more prevalent.
• Vendor Lifecycle Management (VLM): VLM is an end-to-end approach to managing vendors with transparency and structure. In many forward-thinking companies, lifecycle management has taken piecemeal, siloed purchasing by individual departments for greater efficiency and support the overall strategy.
• Vendor Relationship Management (VRM): VRM refers to the process of nurturing relationships with suppliers of services and products. The goal is to ensure smooth operations by delivering quality services and products promptly that meet or exceed their contractual obligations.
• Vendor Management System (VMS): These are software suites that help businesses take care of processes involved in the end-to-end vendor management process, from initial contact to final closure of a deal or the establishment of a business relationship. A VMS usually has apps or specific modules dedicated to processes like onboarding, time tracking, delivery monitoring, invoicing, and payments.
• Vendor Insourcing: This refers to charging company departments and personnel to deliver services or products. Companies with multiple subsidiaries might use one subsidiary to support another.
• Vendor Outsourcing: Outsourcing is the hiring of unaffiliated external organizations to complete specific tasks. Vendor outsourcing works in a variety of business settings, from retail to entertainment to manufacturing.
• Vendor on Premises (VOP): This is an exclusive, long-term general contractor relationship with a separate company that provides products or services on the hiring company’s premises. The VOP might also subcontract other vendors on an as-needed basis, with the approval of the hiring entity. Large-scale manufacturers often rely on VOPs.
• Managed Service Provider (MSP): MSPs outsource the responsibility for anticipating and maintaining a range of functions and processes to improve operations and cut expenses. MSPs are often the providers of specialized IT services.
• Employer of Record (EOR): An organization assumes legal responsibility for all aspects of human resources and acts as its employees’ employer. EORs keep the business in compliance with regulations, labor laws, and other types of legal restrictions. In international scenarios, regulations regarding benefits, taxes, and compliance can be complex. Tech companies use EORs to hire staff under work visas.

The IT vendor management process is different from managing regular vendors. Increasingly, IT is of higher importance and value to companies. Simultaneously, data-related risk and the constant evolution of needs and requirements can make IT a management challenge.

Companies of all sizes might have difficulties handling IT needs. To help with the sheer volume of work, vendors (sometimes many of them) are a necessity. To manage IT vendors successfully, many companies now have IT VMOs with a staff with a comprehensive understanding of technology, contracts, and finance. 

In addition to all the contractual, technical, and financial issues, VMOs follow a vendor management process to manage risk, performance, and relationships, just like their vendor management peers. “IT vendor management strengthens service, contains costs, and reduces risk to extract the highest value from the investment,” says The Art of Service’s Blokdyk. “Value is all about technology implementation using the right policies, processes, and procedures to support your business needs.”

“Most IT vendors must work from an underlying service-level agreement (SLA),” explains Blokdyk. “These define the relationship and anticipate issues and how to deal with them. The SLA’s incident management process workflow defines that the vendor is responsible for communicating outages, incidents through tickets, emails, and SLA response times.”

Here are some IT vendor management tips from Blokdyk:

• Be Prepared for Disaster: “Take every possible precaution before you entrust data, business continuity management, or incident management to a vendor,” warns Blokdyk. “Make sure that a failure of a vendor's systems or processes won’t cause significant impacts to your company or your clients’ business processes, and doesn’t interrupt the revenue stream.”
• Pick Up the Pace of Data Analysis: Collect and analyze vendor evidence daily. Focus on risk analysis and necessary remediation. Establish a process to resolve disputes between your organization and its vendors.
• Build In Sub-vendor Management and Responsibility: Insist on knowing about your vendor’s subcontractors and how they handle critical cybersecurity and legal issues that might affect your organization.

Cloud-based tools are scalable, integrate easily with operational tools you already have, and save time and money. They are often a strong option for companies looking for a software solution to support their vendor management process.

Does VMS justify the cost? That depends on the current number of current vendor relationships. If you haven't had any problems connecting your business with reliable, trustworthy vendors and keeping the management process on track, you might not need to invest. However, if your business is on the verge of scaling up, you'll need a system that enables you to manage added complexity and a significant number of vendors.

To learn more about buying vendor management software, refer to “How to Choose Vendor Management Software.”

Empower your people to go above and beyond with a flexible platform designed to match the needs of your team — and adapt as those needs change. 

The Smartsheet platform makes it easy to plan, capture, manage, and report on work from anywhere, helping your team be more effective and get more done. Report on key metrics and get real-time visibility into work as it happens with roll-up reports, dashboards, and automated workflows built to keep your team connected and informed. 

When teams have clarity into the work getting done, there’s no telling how much more they can accomplish in the same amount of time. Try Smartsheet for free, today.