With value taking precedence over cost, vendor management is about transforming your organization’s vendor relationships from simple supply-and-demand into mutually beneficial partnerships. This requires intelligent strategy, careful planning, and no small amount of hard work.

It’s worth the effort, however, since truly effective vendor management processes help you identify the best vendors. These suppliers provide the quality, service, price, and support that build lasting value and align with your company’s goals.

1. Review Business Goals and Metrics

Every business has different goals. To get the most from your vendor relationships, you first need to understand what you need from vendors to maximize your company’s success. Do you need massive quantities of a particular product from a single source with iron-clad reliability? A comprehensive set of insurance benefits for a multiple groups of employees at different price points? A high-tech software suite for a small but critically important number of staff? The answers will shape how you evaluate the worthiness of a potential supplier.

Armed with a clear view of the goals procurement is supporting, you’ll be able to create benchmarks for the right kind of vendor. This will help you zero in on those suppliers who best support your company’s priorities and ambitions.

2. Evaluate Your Existing Third-Party Spend

Starting with a clear view of your existing spend is essential to optimization. Perform a thorough spend analysis to gain visibility of the resources already flowing out through direct and indirect spend.

A spend analysis can help you pinpoint which vendors are receiving the lion’s share of your company’s spend, and guide you to informed decisions as you refine your strategy.

3. Assemble Your Team

Like any complex component of a successful business, vendor management policy is best tackled by a team with expert knowledge. Build a specialized team focused on every aspect of the vendor management process, including:

• Establishing Best Practices and Vendor Management Strategy
• Establishing Key Performance Indicators (KPI) for Vendor Evaluation
• Create and Manage a Database of Existing and Potential Vendors
• Contractor and Vendor Selection
• Due Diligence for Potential Partners
• Transaction Management Related to VRM
• Vendor Contract Negotiation and Management
• Vendor Performance Reviews
• Ongoing VRM Development
• Interdepartmental Facilitation
• Implementation of Centralized Procurement Software
• Complete Accounting Documentation

The goal of this team is to continually streamline for maximum value and optimal total cost of ownership (TOC) for any goods and services provided. Its members serve as the primary point of contact for all vendors, and the strategic core of your vendor management system.

4. Use Smart Vendor Sorting

How you silo your suppliers will vary by industry and specific goals. But as a rule, vendors can be sorted into three general groups:

• Primary (or Key) vendors are single-source, with high value and low volume
• Secondary vendors have multiple sources and provide moderate value
• Tertiary vendors provide plentiful options, with low value and high volume

Sorting your vendors into these categories gives you a strategic starting point for further granulation and simplify performance management.

5. Mitigate Vendor Risk and Maximize Performance

No matter the industry, every company has risks related to security, finance, technology, and reputation. If, for example, your company is focused on industrial manufacturing, your focus might be on mitigating environmental impact, reducing logistics expenses, and eliminating theft. On the other hand, if you specialize in information security services, it’s likely cyber security, data integrity, and fraud are among the heavy hitters on your risk list.

You can reduce your exposure by:

• Assigning a member of your VRM team to the role of Vendor Risk Manager, focusing on vendor risk assessment. This person carefully monitors all vendors for changes that could expose your company to unacceptable risks.
• Defining risk management plans for the three categories of vendor, as well as individual vendors, with multiple solutions for critical scenarios that might occur. For example, the risk management plan for any single-source supplier should have a contingency for immediate replacement in the event of disaster.
• Re-evaluating the risk of any supplier whose role changes and adjusting your approach accordingly.

You can’t plan for everything, of course, but a winning risk plan is one that defines as many potential scenarios as possible, with one or more strategic options for each. Monitor your supply chain at all levels, and stick to the plans you’ve made as circumstances demand—but don’t be afraid to adapt, either.

6. Monitor Performance Regularly

Whether they’ve been with you for years or are brand new to your company, vendors require regular performance reviews. The KPIs established by your VRM team will provide you with the guidelines you need to determine how much value a particular supplier is providing.

A few KPIs you might use as benchmarks when evaluating vendors include:

• Mutually-agreed-upon performance targets, e.g. volume of goods, server uptime, shipping delays, etc.
• Contract compliance
• In-house satisfaction, including vendor relationships with key team members
• Vendor risk based on company goals, market performance, and social and financial presence

Using these KPIs, you can quickly and reliably identify your “problem children” among your vendors and address any unusual changes or ongoing problems. You’ll also have a jumping-off point for relationship improvement (as needed), and head off disasters before they can damage or even destroy a mutually beneficial relationship.

7. Prioritize Effective Communication

Even the most efficient and effective vendors can’t read your mind. Make constant communication a cornerstone of your VRM team’s strategy. Keeping everyone in the loop will make it easy to avoid costly errors and nip potential problems in the bud.

Vendor management allows you to build a relationship with your suppliers and service providers that will strengthen both businesses. Vendor management is not negotiating the lowest price possible but constantly working with your vendors to come to agreements that will mutually benefit both companies.

Share Information and Priorities

The key to succeeding in vendor management is to share information and priorities with your vendors. That does not mean that you throw open the accounting books and give them user IDs and passwords to your systems.

Appropriate vendor management practices provide only the necessary information at the right time to allow a vendor to serve your needs better. It may include limited forecast information, new product launches, changes in design and expansion or relocation changes.

Balance Commitment and Competition

One of the goals of vendor management is to gain the commitment of your vendors to assist and support the operations of your business. On the other hand, the vendor is expecting a certain level of commitment from you. It does not mean that you should blindly accept the prices they provide. Always get competitive bids.

Allow Key Vendors to Help You Strategize

If a vendor supplies a key part or service to your operation, invite that vendor to strategic meetings that involve the product they work with. Remember, you brought in the vendor because they could make the product or service better and/or cheaper than you could. They are the experts in that area, and you can tap into that expertise to gain a competitive edge.

Build Partnerships for the Long Term

Vendor management prioritizes long-term relationships over short-term gains and marginal cost savings. Constantly changing vendors to save a penny here or there will cost more money in the long run and will impact quality. Other benefits of a long-term relationship include trust, preferential treatment and access to insider or expert knowledge.

Seek to Understand Your Vendor’s Business Too

Remember, your vendor is in business to make money too. If you are constantly leaning on them to cut costs, quality will suffer, or they will go out of business. Part of vendor management is to contribute knowledge or resources that may help the vendor better serve you. Asking questions of your vendors will help you understand their side of the business and build a better relationship between the two of you.

Negotiate to a Win-Win Agreement

Good vendor management dictates that negotiations are completed in good faith. Look for negotiation points that can help both sides accomplish their goals. A strong-arm negotiation tactic will only work for so long before one party walks away from the deal.

Come Together on Value

Vendor management is more than getting the lowest price. Most often the lowest price also brings the lowest quality. Vendor management will focus quality for the money that is paid. In other words: value! You should be willing to pay more to receive better quality. If the vendor is serious about the quality they deliver, they won’t have a problem specifying the quality details in the contract.