For any organization with a large vendor base or complex supply chain, the task of managing vendors can often be a difficult one. The practice of vendor management, however, is something that all organizations, of any size, should look to establish and maintain.
Vendor management is an organization’s ability to oversee all contact with third-party vendors. When managed effectively, vendors can help you meet customer demand and streamline your supply chain execution for improved production and profit.
There are two important steps involved in carrying out vendor management successfully. Firstly, preferred vendors need to be selected. From there, a strong relationship needs to be maintained with those vendors, in order for both parties to continue to get the most value from the relationship.
About 54% of organizations include supply chain vendor management in their planned procurement improvement initiatives.
The relationship element is particularly important in order to get the most out of your vendor management initiatives. Communication, collaboration, and trust are all key to establishing and maintaining an effective relationship with vendors. In a blog about hacking the supply chain, we discussed the ways in which organizations can enhance their relationships with vendors.
When organizations have an adequate amount of control and visibility over their vendors and a strong working relationship with them, they experience a number of benefits.
Benefits of Vendor Management
Increased Efficiency
As relationships with vendors develop, so too will the lines of communication. Over time, vendors will become more familiar with your organization – the people who work there, how it operates and the business goals and objectives. This will enable them to improve the efficiency of their service in the form of competitive pricing, higher quality goods/services, and reliability.
Technology also has a major role to play in vendor management and the resulting efficiencies. E-procurement solutions enable procurement teams to automate their purchasing process. Powered by artificial intelligence (AI), the solution tracks stock levels and automates orders when stocks reach a certain level. Vendors can also be onboarded and communicated through such systems, ensuring relationship maintenance and the use of only preferred vendors.
Improved Compliance
Another benefit to be experienced from effective vendor management is improved compliance. By working with compliant vendors, your organization will avoid many vendor-related risks. We’ve previously discussed the 3-step process to ensuring vendor compliance.
Vendor management starts from as early as selecting and onboarding vendors. In order to ensure the vendors that you are working with are compliant, it is important to assess their capabilities before selecting them. From there, management of vendor contracts and regular monitoring will ensure that they maintain the high standards expected of them.
With compliance maintained amongst your vendors, your organization will be protected against any threats to the quality and prices of product/services that you purchase and the lead times involved in receiving them.
Reduced Costs
According to a procurement report by Deloitte, improving margins by reducing costs ranks as the fourth biggest enterprise priority in 2023.
Through effective vendor management, organizations can significantly reduce the amount of money they spend with their vendors.
Vendor management benefits are often interlinked. For instance, compliance plays a key role in reducing costs. When assessing vendor capabilities, particular attention should be paid to their pricing. Also, it is important at this stage not to limit your supply base. Assess and onboard an adequate amount of vendors that can facilitate your organization’s goals and objectives, who will compete for your orders and thus bring prices down.
Again, technology can also greatly enhance your vendor management and cost reductions. Spend analysis reporting – found within many e-procurement solutions – allows organizations to track their expenditure in real-time and assess where they are overspending, which vendors they are overspending with, and the vendors guilty of inefficient turnaround times. As a result, organizations can save millions of dollars each year.
Improved Reliability and Quality
As you improve your vendor management with better efficiency, streamlined relationships, and superior products, you will also see reduced risk in your business model. Strong relations with vendors will yield better response times and overall improved reliability and quality of service provided.
During the assessment stage of potential vendors, organizations are able to eliminate any low-performance vendors. Existing, low-performance vendors, can also be eliminated when reviewing contracts. Taking such actions against potentially non-compliant vendors helps to mitigate the risk of poor service being delivered.
Having the assurance of high-quality products/services being delivered by your vendors also has its benefits from cost savings. You will find that your organization saves money by not having to replace faulty products or inadequate services when vendors deliver to the required standard.
Strong, long-term relationships with vendors also encourage collaboration between both parties. When both vendors and procurement teams actively engage in the sharing of feedback and ideas, processes can be greatly improved.
Vendor Management can be a complex undertaking for organizations with large, complex supply chains. However, establishing and maintaining strong working relations with your vendors is key to optimizing your production levels and profits. Procurement functions should dedicate specific teams to manage vendors. Striking a balance between control, communication and trust with your vendors will put your organization in a strong position to capitalize on the benefits of implementing vendor management.
