5 Vendor Management Best Practices

Blog - 20 Oct 2020

The Covid-19 pandemic has caused major disruption to supply chains and with countries entering and exiting different levels of restrictions, disruption is certain to continue.  For many organizations, this will have exposed a reliance or perhaps even an over-reliance on certain vendors while relationships with all vendors will also have been put to the test.

Depending on the needs of your organization, you may have been required to have discussions with vendors over the likes of minimum/maximum order quantities, payments T&Cs or returns policies, in direct response to changing consumer demands as a result of the pandemic.

A lack of visibility over vendor information and activities can catch up on organizations in times of uncertainty. Areas that need addressing, such as payments T&Cs, may be difficult to identify. Once such areas have been identified, the conversations required with vendors are likely to be more difficult if there has been a lack of prior engagement. Failure to react quickly to supply chain disruptions can be extremely costly.

The key to handling situations like these is the prioritization of vendor management. A detailed vendor management process can also bring many benefits to your organization, outside of a period of disruption and uncertainty.

According to PWC, the biggest benefit of vendor management is improved efficiency. Such efficiencies range from a higher quality of goods/services to faster deliveries to competitive pricing, all of which will have a direct impact on your company’s profitability.

vendor management best practices

Organizations that chose to prioritize vendor management strategies in advance of the pandemic will have been in a better position to handle the supply chain challenges that this year has brought. If you have not prioritized vendor management already or are looking at ways to implement it, the best practices listed in this blog will help you towards experiencing the many benefits that it brings.

 

Vendor Management Best Practices

 

1. Embrace Technology

Technology has changed the way businesses operate. The adoption of vendor management technology by Procurement and Accounts Payable is vital to the success of your organization.

Vendor management technology opens up a wealth of opportunities for organizations. For example, with vendor on-boarding, business removes many of the risks associated with working with new vendors. With compliance documents and financial information uploaded from the outset and maintained thereafter, organizations are given the assurances that vendors will be able to fulfill obligations at all times.

A centralized system that incorporates both your vendor management and procurement processes will remove the risk of maverick spending taking place, with only approved on-boarded vendors available to purchase from.

Vendor management technology also brings many advantages to the AP department. By using a system that allows both Procurement to raise purchase orders and vendors to submit invoices, Accounts Payable are given full visibility over the Procure-to-Pay process. Vendor portals also give vendors full visibility over the status invoices that they have submitted. Any queries, delays, or discrepancies can be addressed directly with AP through the portal.

The increased visibility and communications provided will result in significantly enhanced relations with vendors.

According to Levvel Research, 81% of organizations reported improvements in vendor relations following the implementation of supporting technology.

vendor management best practices

The key to achieving the true benefits of vendor management technology is to choose a solution that incorporates as many vendor management features as possible, that will benefit both your Procurement and Accounts Payable functions, along with the vendors your work with and rely on.

 

2. Select the Right Partners

The vendors that you choose to work with and the relationships that you share with them will have a major impact on supply chain management and your ability to react to challenging situations.

As vendor management best practices go, selecting the right partners is vitally important and includes a number of different stages.

Firstly, it is vitally important to assess any potential vendors’ capabilities. Consider things such as the capacity of their workforce, how capable they are of meeting your organization’s requirements, their location and financial status.

Once capabilities have been assured, the details of any working relationship need to be put into a contract, stating explicitly what the vendor will provide. Details included should cover the likes of delivery times, order specifications and costs, ensuring that there is clarity on both sides. Effective vendor management may allow you to re-negotiate these things during the course of the contract, but it is important to put agreements in place from the beginning of the working relationship.

However, even with contracts in place, it should not be taken for granted that vendors will always deliver to the expected standards and therefore ongoing performance monitoring should also be a key component of your vendor management.

 

3. Monitor Vendor Performance

It is vitally important that the process of vendor performance monitoring is put in place in order to ensure that vendors continue to provide value, are adhering to contracts and agreements and are not presenting any potential risk to the running of your business.

Central to this process will be the establishment of KPIs at the time of agreeing contracts with your vendors and these should be clearly communicated both with your vendors and also with key stakeholders around the business, so that everyone knows what is to be expected from the relationship.

A vendor management system that monitors vendor activities, tracks compliance obligations and maintains vendor data will ensure that you are kept up to date on vendor performance  and can react accordingly if performance deteriorates.

 

4. Focus on Data and Analytics

Data and analytics is empowering organizations more than ever before to make informed, strategic decisions. This is also true in the area of vendor management, with the use of data and analytics now recognized as an area to focus on.

As reported by Deloitte, spend analysis is one of the main areas of Procurement where technology is having a major impact.

 

vendor management best practices

Your Procurement activities directly impact your ability to manage your vendors. By investing in a solution that provides real-time spend analytics you can both assess your vendor risk, where dependency may outweigh the strength of the vendor, and identify opportunities for savings. Such savings may be realized by re-negotiating with vendors that you have built strong relations with or by choosing not to renew contracts that offer poor value. Having detailed spend data will be key to making informed decisions such as these.

 

5. Vendor Segmentation

If your organization is the subject of a large supply chain, vendor segmentation can be one of the most effective vendor management practices. Grouping vendors, based on what they provide and how their services fit your business model, facilitates procurement activities and serves to improve communication between your organization and your vendors. According to Spend Matters, vendor segmentation is an integral step in building effective vendor relations. It ascertains “an appropriate level of engagement with specific suppliers and also helps define the right level of resources required to manage the suppliers at various levels.”

Some vendors may be considered strategic, while others may be essential and both segments will be handled very differently. By segmenting vendors, you provide yourself with an accurate framework in which you can truly assess their value and dedicate your efforts towards them.

One of the most accurate frameworks for segmenting and assessing vendors is the Kraljic Matrix, devised by Peter Kraljic in 1983. In this, he argues that supply items should be segmented by risk and profitability.

Risk refers to the likelihood of an unexpected event occurring within the supply chain that will lead to disrupted operations. Profitability describes the impact of a supply item on the bottom line.

vendor management best practices

 

Given the level of disruption to supply chains over the past few months and further disruption anticipated, segmentation of vendors is highly recommended in order to minimize risk and ensure continuity.

 

Conclusion

Global supply chains have been severely disrupted this year. It is vital that organizations prepare for further disruptions with resilient and adaptable plans. Central to this plan should be a focus on vendor management. By focusing on the vendor management processes mentioned in this blog, you will be best placed to navigate the current disruptions and strengthen your supply chain for any future challenges.

 

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Posted by

James Duffy

P2P Insights Manager