Vendor management in business: The ultimate guide [for 2024]
Learn about vendor management and how technology can improve business outcomes.
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1 minute
July 25, 2024
Businesses use vendor management to optimize the delivery of goods and services, uncover cost savings and operational efficiencies, minimize supply chain disruption risks, and maintain positive vendor relationships.
Read this guide to learn more about vendor management best practices, how automation can assist the process, and top vendor management systems (VMS) on the market.
Key highlights:
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Vendor management involves activities essential to procuring goods and services to support a company’s operations. These include contract negotiation, sourcing, spend management, communication, and risk mitigation.
What happens if a business has poor vendor management practices? They can expect late shipments, upset vendors, and damaged relationships that could ultimately impact their financial performance and customer relationships.
Vendor management strategies aim to optimize the delivery of goods and services, uncover cost and operational efficiencies, minimize supply chain disruption risks, and maintain positive working relationships across the entire vendor lifecycle.
Vendors and suppliers sell products and services but differ in several important ways. First, vendors sell finished goods and services. In a B2B context, this could be a business selling its credit card expense management platform to a CPG company that wants to better control spend.
On the other hand, suppliers sell raw materials and services to businesses, typically to manufacture other products that are then sold to end customers.
A good vendor is a subject matter expert in your industry. Conduct market research using industry associations, trade shows, and niche industry publications to find reliable vendors. Talk with business peers to identify the right vendors for your needs.
Chances are, if a peer executive you trust works with a vendor, that vendor is highly likely to be a fit for you.
The procurement process starts when the business determines a specific product or service need. Business owners ask vendors for a bid or send a written request for proposal (RFP) document for large or complex orders. The price is negotiated, items are delivered, and the vendor is paid.
An effective vendor management process includes a system to track vendor performance. IT vendors, for example, need to fix software bugs quickly once they are identified.
Businesses need a well-planned process for each stage of vendor management to identify reliable vendors and negotiate reasonable terms.
To select vendors, businesses must determine their requirements, communicate requisitions to vendors, and determine if the vendor can meet the company’s needs. For example, assume that a CPG beverage company needs a vendor to supply glass bottles.
The company’s requirements include quality standards, such as glass thickness and the materials used to produce the bottles. Vendors need to know the quantity required, delivery timelines, and the price range the company will consider.
Information may be communicated in an RFP or a more informal document. The business may contact a small number of known vendors or transmit the request to an industry publication or online community.
When a vendor supplies an RFP or simply verifies that their firm can provide the product or service, the buyer must perform due diligence on the vendor.
To assess vendors, consider the company’s experience level in your industry, reputation, responsiveness of customer service, and product quality. In addition, you need a vendor with the production capacity to meet your needs.
The beverage company can evaluate vendors based on past performance, research, and speaking with industry peers. Vendor management practices may also include site visits to the vendors' facilities.
Businesses negotiate contracts with new and existing vendors when contracts are renewed. The goal is to reach an agreement that benefits both parties and builds a long-term relationship.
Contract management language must define the specific goods or services required. Here are some other details that are stated in the contract:
Both parties may have the contract reviewed by an attorney.
Onboard new vendors by gathering vendor data, including tax information (e.g., 1099 Form), preferred payment methods and instructions, proof of insurance, certifications, and licensing (if needed).
All relevant vendor information should be stored in a centralized database so records can be easily accessed. Businesses also need a process for notifying vendors when documents (such as licenses or proof of insurance) need to be updated.
Make the onboarding workflow as clear and simple as possible so that reliable vendors will continue to do business with your firm.
Implement a business process to move vendor orders from invoice receipt to payment smoothly:
Evaluate vendor performance against key metrics, including delivery speed, quality of goods and services, responsiveness, and compliance. Vendor risk management is important to minimize these risks:
To assess vendor performance and maintain accurate vendor data, documentation, and transaction history.
Invest in vendor management to deliver goods and services more efficiently and strengthen vendor relationships. An investment can make vendor sourcing and onboarding easier and reduce the risk of supply chain disruptions.
A strategic vendor provides the most important product or service for your operation. Many businesses view relationships with key vendors as partnerships. Vendor relationship management is critically important for achieving business objectives.
The Harvard Business Review explains that stronger vendor relationships build trust, which may improve your ability to negotiate better terms from satisfied vendors. A vendor may accept a slightly lower profit margin to do business with a valued client.
When you improve your vendor management program, you can minimize a number of risks:
Any improvement that speeds up vendor management frees up staff time to work on other tasks that add more value. When your staff is more productive, you can reach business goals faster.
When products are shipped on time, customers may be satisfied, and you may retain repeat business opportunities. Vendor performance management should evaluate the impact on your end customers.
Take action to improve vendor relationships so you can avoid the need to replace vendors. Finding new vendors requires time and effort and takes time from managing the business. Here are some strategies to solidify supplier relationships.
Use vendor management software to speed up invoice processing, approvals, and vendor payments. Automation reduces the risk of manual errors and lost documentation. The software platform can provide a centralized location for all communications related to a specific invoice, including payment status.
When you clearly state requirements, vendors can quickly decide whether to respond to an RFP or conclude that they can’t meet them. Service providers should be able to quickly review an RFP template and understand the requirements.
When a vendor has a question, respond quickly so that the vendor can evaluate your business needs. Explain when you need a response from the vendor and when you’ll decide on each RFP.
You know your industry, and you likely have a good idea of a product or service's cost and the profit margin a vendor can generate. Negotiate reasonable prices so that the vendor can generate a profit and build a relationship with you while you also control costs.
Vendors have to manage their cash flow, just like any other business. Make payments on time so that vendors can cash flow their operations. Supplier management is a two-way street, and you must treat vendors fairly.
Vendor management job titles, required skills, and responsibilities can vary depending on the size and complexity of the business and the industry.
These job titles differ slightly based on the particular focus of each position:
My primary responsibility is to manage vendor relationships, keep the transactions in line with organizational goals, and resolve issues.
Focus on minimizing risk by ensuring vendors comply with contractual obligations and regulatory requirements.
The primary role is to manage vendor selection, contract negotiations, invoice processing, and the receipt of goods and services.
The duties of these jobs may overlap, but the primary focus of each position is different.
To succeed in a vendor management role, you need a combination of communication skills, management skills, and attention to detail. Here are the most important skills managers need.
Managers need to clearly state the organization's needs and answer detailed vendor questions regarding RFPs. Vendors invest time and money to respond to RFPs, and your answers must be precise.
Managers also need negotiation skills to obtain favorable pricing terms from vendors.
Managers need to identify a problem's root cause and develop solutions quickly. You’ll need skills to resolve disputes professionally. Disputes may involve shipping delays, quality issues, or contract disagreements.
As a business scales, managers must oversee a growing number of vendor relationships. Each vendor has a unique set of contracts and shipping timelines, so you need strong organizational skills to keep all vendor agreements and payments on track.
Managers also need planning skills to manage vendor needs for future production.
Businesses must perform financial analysis to maintain profitability, and vendor managers need a strong understanding of economic concepts.
A manager should be able to quickly compare an item's budgeted cost with the vendor’s bid and determine its impact on profitability. Should the manager accept a slightly higher price from a reliable vendor? Managers need skills to perform this type of analysis.
Finally, vendor managers need industry knowledge to make informed decisions regarding vendors.
Vendor management salaries vary depending on the business size, geographic location, and experience level. Salary.com reports an average base salary of $116,899, ranging from $102,595 to $137,712. Glassdoor discloses a salary range from $73,000 to $127,000 a year.
Job candidates with industry certifications may secure a higher salary. For example, The Institute for Supply Management (ISM) offers a Certified Professional in Supplier Diversity (CPSD) credential. Professionals with this certification may earn more than their peers.
Here is a job description that lists common responsibilities and qualifications for a vendor manager in the CPG industry.
We seek an experienced vendor manager to oversee vendor selection, contract negotiation, vendor performance, and relationship management. The ideal candidate will demonstrate excellent communication, negotiation, problem-solving, and analytical skills.
After reviewing vendor management and the best practices to improve your process, think about the vendor management solution features that are most important for your business.
And if you still need help choosing an automated vendor management platform, let's make this easy.
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Competitive data was collected as of March 19, 2024, and is subject to change or update.
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