An effective vendor management strategy is key to your organization's success. When implemented right, it boosts your bottom line and maximizes value for you and your vendors.
Here, we'll take a closer look at what effective vendor relationship management looks like, covering vendor management best practices and how to consider vendor performance standards at each step of your workflow.
When you understand and apply these principles, you empower your team to build strong vendor relationships in your firm's supply chain.
Vendor Management in a Nutshell
Like many other organizations, you rely on a variety of service providers to support your business needs. So, it’s clear that a well-functioning supplier management system is pretty integral to your overall business strategy.
Getting on top of tasks like vendor selection, contract negotiation, and vendor risk assessments will cover all your bases and make sure your supply chain is both efficient and legally compliant. As a result, your vendor management process will keep your business competitive in the changing market while providing the best possible value for your customers.
Along with supporting your risk management team's efforts to spot the risks associated with vendors, these tasks also help you control your operational costs and ensure that vendors meet your expected performance standards.
How a Good Vendor Management System Levels Up Your Organization
When you put dynamic vendor management systems into action in your business processes, your team can more easily keep control over your supplier relationships.
Other than the obvious benefit of controlling costs, other operational wins can show up as:
- Better oversight of your supply chain environment
- A centralized system of record for all your vendor information
- Increased understanding of your vendor risks — and how you can mitigate them
- A better handle on your regulatory compliance management, staying up to date with certifications and vendor contracts
- More help with meeting your ESG goals
- Faster access to the right vendors
- Easier collaboration with your vendors
- A streamlined vendor onboarding process
- Increased team efficiency
- Reduced resource burdens and cost savings
A robust system also makes it easier for your team to evaluate vendors' performance against your business KPIs and metrics, as we mentioned earlier. The more vendor data you have, the better you can assess their performance over time.
6 Core Elements of a Good Vendor Management Process
To get the most out of your key supplier relationships, there are a few core elements you’ll need to build a comprehensive vendor management strategy.
An effective vendor management process will always include:
- Strategic organizational goal-setting: Working with key stakeholders and senior management to set your specific business goals — for example, dialing up your ESG strategy to reduce your scope 3 greenhouse gas emissions — will give you the key performance indicators (KPIs) and performance metrics you’ll use to measure and evaluate your vendors’ success.
- Vendor procurement: Using a fine-tuned request for proposal (RFP) process will streamline the way you source and select your new vendors. RFPs should include a detailed description of goods and services your business needs, pricing expectations, service level expectations, and other important details.
- Vendor risk assessment: Carrying out detailed due diligence to assess new vendor risks will guard your company’s reputation against being dragged by association in less-than-legit situations.
- Contract negotiation: It’s crucial to negotiate your third-party contract terms and service level agreements (SLAs), so you and your vendors are on the same page regarding the quality of services they will provide and the timeframe in which they will provide them.
- Supplier onboarding: Using a dashboard like Certa’s will make sure your suppliers have access to the right information, contact points, and resources they need to carry out their services effectively from the start — which will help you set a positive tone for your working relationship.
- Continuous performance management: Performing regular risk assessment questionnaires throughout the vendor lifecycle is the best way to identify potential problems before they escalate into serious threats.
Vendor Management Challenges to Watch For
While it’s an important component of any business, vendor management can present its own operational challenges. One of these is around encouraging efficient communication and collaboration between vendors and internal teams.
Effective communication allows everyone involved to better understand how their work impacts vendor performance. But without dedicated vendor management software (VMS) like Certa to help, it's tough to coordinate tasks and keep everyone clear on project timelines, expected outputs, and other expectations.
For businesses with complex supply chains, vendor management can also be time-consuming, especially if there are several suppliers involved in different project stages — and that's before we've even touched on all the mandatory paperwork involved for contract management, purchase orders, invoicing, and ongoing performance reviews.
It's no easy feat to track and measure your vendors' performance in different business areas if your team doesn't have a holistic view of the situation. Tools like Certa’s vendor management web-based platform can help your entire supply chain network to communicate more effectively, organize workflows, and share vital information in real-time, so nothing falls through the cracks.
Cautionary Vendor Management Tales
Let's look at some of the most important aspects of the vendor management process and how they work together to help you avoid poor practices. Not paying enough attention to any of these elements can lead to major operational problems for your team — and serious consequences for your bottom line.
Here are two practical examples of what failure looks like in your third-party risk management:
The Boeing Dreamliner
Consider the Boeing Dreamliner fiasco as a cautionary tale about what not to do with your supply chain. By outsourcing most of its production, Boeing fumbled the bag in the final assembly, which ended up costing the company around $32 billion.
In this case, Boeing's choice to outsource their core areas of business, manufacturing and engineering, backfired spectacularly. The company lost control of its supply chain and had very little visibility on its vendors' subcontractor activity, which caused issues with completing work on schedule and to the expected standard.
From battery fires to issues with part quality and fuel leaks, there's a long list of supply chain issues Boeing could have mitigated with proper oversight into their third-party risks. To date, Boeing’s profitability on 787 production still hasn’t evened out.
Poor Procurement at KFC
In 2018, the U.K. division of KFC ran out of chicken (yes, you read that correctly) in over 70% of its restaurants nationwide because of a single-point-of-failure with its new logistics provider.
If KFC had done its due diligence properly when selecting vendors, the company would have discovered that its new vendor had only one warehouse in a location that was vulnerable to road incidents and high traffic. Unfortunately for said vendor, the first day of its contract was plagued by gridlocked traffic after two major accidents nearby.
This caused severe damage to KFC's brand image and left many unhappy customers complaining, loudly, about missing out on their fix of crispy fried chicken.
Vendor risk mitigation strategies during your procurement processes can go a long way toward supporting contingency planning.