Vendor Management: The Key to Strong Business Partnerships

Products make a business.

Building an outstanding product requires collaboration from internal and external strategic partners in today's crowded marketplace. These external partners, often called vendors, serve businesses with essential goods and services that bring the buyers’ products to the forefront.

Since vendors are such an important asset, you can’t overlook the necessity of refining and simplifying their responsibilities. Vendor management software is the perfect tool to build successful business partnerships and drive smart growth.

What is a vendor?

Vendors are sole traders or big firms that provide services, goods, or a combination of each to other businesses or consumers. Depending on the type of industry, they bring different things to the table, like logistics, distribution, marketing services, food and beverage, or staffing services.

Types of vendors

Vendors are divided into the following categories based on their role in the supply chain and the customer base they serve.

• Manufacturers are individuals or enterprises that make finished products from raw materials and sell them to businesses, wholesalers, retailers, distributors, or directly to consumers. Examples include Michelin, HP Inc., Nestle, and Pepsi Co.

• Wholesalers, unlike manufacturers, don’t take part in building anything. They usually buy the products in bulk and sell them to retailers at a higher price. Think Alibaba, Costco, or eBay. 

• Retailers deal with goods in smaller quantities and market them to customers for personal use. Manufacturers or wholesalers own and sell the products or services. The key here is selling directly to consumers. Walmart, Amazon, Target, and 7-Eleven are retailers.

• Services and maintenance providers extend assistance in areas such as banking, marketing, IT support, transportation, or consulting. Quickbooks or Amazon Web Services are two examples. Check out our list of the best business service providers in different domains.
  

Customer-based vendors

• Business-to-Business (B2B) vendors specifically service other businesses. A typical example of this trade is when a company needs to buy raw materials. This would include  Salesforce, General Mills, Slack, or FedEx. 
• Business-to-Consumer (B2C) dealers sell their products directly to consumers without intermediary involvement. Companies like H&M, Ikea, Google, or Netflix fall under this category.
• Business-to-Government (B2G) trade involves selling products and services directly to the government. Vendors, like Lockheed Martin or Boeing Business Jets, need to obtain a license and special permission to file bids to secure work.

Vendor management vs. procurement vs. supplier relationship management

Vendor management ensures that vendor relationships are successful through refined search, better onboarding and contract management, assessing vendor performances, and mitigating vendor risk. 

Procurement focuses on saving funds and mitigating contractual risk by planning purchases, maintaining standards, selecting the right supplier, negotiating prices, and overseeing inventory. A well-defined procurement strategy can optimize your inventory and reduce production waste.

Supplier relationship management (SRM) focuses on building and managing a mutually beneficial relationship between the buyer and supplier by strategically planning, tracking performances, organizing partnerships, and streamlining payments. 

Why is vendor management important?

Having a system for vendor management is like having a premium subscription to your favorite app. Buyers use it to narrow down their choices from a wide range of options while getting better deals on those purchases. The consumer also benefits because they get quality service with a short turnaround time.

Similarly, vendor management services enable businesses to choose the right vendor for their specific needs and sign more profitable deals. By correctly handling vendor contracts focused on building a good relationship, businesses control costs, negotiate better rates, and ensure that the products and services are up to the standards and delivered on time.

Vendor management process

Every company’s vendor requirement and process of dealing with vendors is different. However, the end goal is to ensure that the organization is getting the best value for its money and that the vendors provide high-quality products and services. The following steps provide a fairly thorough rundown of the typical vendor management process:

1. Vendor selection

The first step involves researching suitable vendors and taking quotes via requests for quotations (RFQs) and requests for proposals (RFPs). From there, you can shortlist desirable suppliers. Make sure you know enough about the supplier's history, reputation, quality of work, client base, and pricing proposal to make a good decision. 

2. Contract negotiation

The contract must be fair and beneficial to both parties to ensure the beginning of a healthy relationship. Pricing, terms and conditions, goods and services, delivery cycle, and payment schedule comprise some of the issues you and the third party have to discuss and document when negotiating a contract. 

3. Vendor onboarding

This step involves enlisting a supplier as an approved vendor and collecting the necessary documentation to ensure they get paid for their services. The details gathered in this stage include contact info, vendor licenses, and insurance details.

4. Performance management

Measure the performance of vendors against set key performance indicators (KPIs) to ensure that the association is mutually beneficial. Options for KPIs are compliance rate, pricing, capacity, availability, lead time, competitiveness, and customer service.

5. Managing risk

Issues associated with onboarding a third party may involve loss of intellectual property (IP), lawsuits, and compliance violations. All these factors put a company’s operations at risk. Review risk assessment and manage vendor risks as often as needed. 

6. Payment

Make sure you pay your vendors according to your contract. There’s really no way to sustain a relationship if you don’t pay them for their work or if you’re always late. 

Vendor management applications

Since you’ve learned about the basics of vendor management, let’s discuss how different sectors use vendor management by focusing on procurement, human resources, and healthcare.

Vendor management in procurement and supply chain

Each company’s purchasing department has to sign profitable contracts with reliable vendors. Mismanagement of vendors disrupts the supply chain, damages supplier relations, increases the risk of poor service, and shrinks profit margins.

But if the procurement and supply chain teams develop solid vendor management, they’ll prevent financial loss and make groundbreaking deals. Smart use of vendor management for profit involves:

• Automating follow-ups and data entry.
• Preventing errors and data duplication.
• Decreasing the time spent onboarding new suppliers.
• Empowering the suppliers to manage their profiles and offerings.
• Making supplier-related information easily accessible.

Vendor management in HR

Vendor management in human resources (HR) deals with staffing agencies that provide employee solution services and help hire a contingent workforce.

Sourcing and managing temporary staff are simplified and improved with effective vendor management. HR professionals utilize vendor management to:

• Effectively communicate with the candidates and manage applications.
• Post temporary requirements for staffing organizations.
• Gain insightful hiring metrics.
• Conduct and automate transactions.
  

Vendor management in healthcare

Healthcare departments may employ vendors for multiple services, like medical supplies, transportation, medical waste, or IT. Effective vendor management in healthcare assists in the following ways:

• Cutting costs for the organization while retaining quality.
• Managing staffing crises by employing travel nurses.
• Ensuring the best possible products and equipment are being used.
• Monitoring and tracking critical data.

Benefits of vendor management

Vendors are an important part of the organization. Among other positives, by carefully selecting and managing vendors, businesses receive high-quality products and services at a competitive rate. Keep reading for more benefits of implementing a vendor management system.

• Time and cost savings. Time is money, and effective vendor management saves both. It allows companies to negotiate better rates and terms and cut back on resources that are no longer required, leading to cost savings. It can also help organizations avoid costly mistakes like ordering wrong or too many products. 
• Increased efficiency. Task and contract management reduces the administrative burden and simplifies the entire process. Having clear agreements helps maintain a smooth flow of operations and avoids delays and disruptions in the supply chain. 
• Improved compliance and risk management. Organizations can protect themselves from security breaches and financial instability by establishing clear policies and identifying potential risks. It also helps businesses ensure that their vendors comply with industry regulations and standards, reducing the risk of legal and regulatory issues.
• Enhanced vendor relationships and collaboration. The vendor management system fosters better and long-term vendor partnerships by providing communication and collaboration channels. Using these channels, both parties can effectively cooperate to achieve goals, resolve issues, and overcome challenges. 
• Receiving the finest quality and service. By working closely with vendors, businesses can ensure they get the highest quality goods and the best service possible. This elevates the quality of products sold to customers and helps the brand maintain its reputation and avoid controversies due to subpar products or services.
• Better vendor management. A comprehensive management process enables companies to browse supplier options and select the right vendor by identifying business needs. It also allows organizations to analyze vendor performance by tracking service-level agreements (SLAs) and setting KPIs. New vendors can also be quickly onboarded by following an established path. 

Challenges of vendor management 

Working with multiple vendors at a high level is tricky. Vendors acting as an organization's extension creates a significant risk of non-compliance, which interferes with operations. 

Because each organization has unique needs and requirements, the guidelines of vendor management aren't framed in stone. For example, let’s say the top challenge for a bank is obtaining vendor information and their proper documents. On the other hand, a healthcare organization is concerned about storing manual data. 

Some other common challenges that institutions deal with are:

• Dubious vendors. When working with several vendors, a single scope of delay might affect the overall business, making background checks a necessity.
• Obtaining proper documents and information. Collecting required documents, such as tax information or compliance documents, takes up a lot of time. The majority of time is spent chasing vendors. 
• Payment risk. Not all vendors have the same terms and payment needs. To tackle this, vendor management software maintains payment schedules even if vendors' terms or methods differ. 
• Outdated information. Updating information from multiple vendors is difficult. Automation simplifies this process.
• Absence of centralized data repository. Vendor management is a collaborative process. It requires departments such as procurement, finance, and leadership to participate in the decision-making. Having a centralized data repository that all users from anywhere can access makes the management process efficient.
• Lack of automation. Relying on manual processes for vendor management wastes time, resources, and money.

Best practices for vendor management 

Working with a third party always presents risks, but following vendor management best practices reduces trouble and improves vendor relationships. You also gain greater value from existing and new vendor partnerships. 

Organizations can use vendor management strategies to strengthen relationships regardless of industry or size. 

1. Establish a clear vendor management policy

 A formally documented policy for vendor management within the organization must exist before onboarding suppliers. The policy keeps the leaders and stakeholders informed about vendor management activities.

It should contain information about the purchasing unit, the purchasing committee, business goals, supplier selection criteria, and vendor diversity. Establishing a policy keeps everyone on the same page about vendor operations and makes onboarding new suppliers easier.

2. Set the right expectations and build vendor contracts

When onboarding new vendors, clearly express your expectations and business goals. It helps set benchmarks, asses vendor performance, build strong supplier relationships, and reduce risks. You also need a legal vendor contract that mentions the responsibilities and expectations, including details like the scope of work, payment terms, and timeframes.

3. Use KPIs to measure vendor performance

KPIs that determine vendor performance and capacity help the purchasing team manage the supply chain and make better decisions about suppliers. When setting KPIs, ensure the vendors understand and agree to them. The performance assessment metrics should be periodically reviewed and refreshed.

4. Build strong relationships and foster collaboration

A solid relationship is created by collaborating with the vendors as partners and asking them to share their views on achieving the goals and expectations. Perhaps it doesn’t need to be said, but paying them fairly and on time strengthens your relationship. Once a strong, profitable, and respectful bond has been established, it’s easier to negotiate on quantity, quality and prices.

Best vendor management software

While you can rely on spreadsheets and emails to manage vendor data, it’s difficult to do well and easy to make mistakes. Any discrepancy in the data leads to business disruption. 

Businesses of all kinds use vendor management software to run smooth operations between buyer and seller. A vendor management system empowers organizations with greater visibility across their third-party collaborations to achieve the maximum benefit from those partnerships. 

Vendor management software streamlines all the processes from search to onboarding to delivery and payment on a single platform. This benefits internal and external stakeholders by providing a central reference point and enhancing efficiency by expediting the process, saving costs, and reducing the risk of supply chain confusion.

To be included in our vendor management category, a platform must: 

• Provide vendor management support
• Have contract management features
• Have a library for supplier and contract information
• Help import data
• Offer email support

*Below are the top 5 leading vendor management software from G2’s Winter 2023 Grid® Report. Some reviews may be edited for clarity.

1. Vanta

Vanta is a security monitoring platform that automates and simplifies security audits. It allows businesses to secure user data and privacy by establishing the best practices required to mitigate risk. The application also makes it easy to acquire and maintain well-known information security standards like SOC 2, ISO 27001, HIPAA, PCI, or GDPR.

What users like best: 

“Becoming compliant with certifications like SOC II is daunting, especially for a startup. Vanta makes it all very easy. It's easy to assemble everything into one place and know exactly what is needed. Additionally, the auditors can access Vanta directly, which also streamlines the whole process. It also feels like they integrate with just about everything you could need.”

- Vanta Review, Cameron W., Aug 23, 2022

What users dislike: 

“All the main integrations work well, but the rest of the integrations are mainly with US-based companies. Also, their list of integrations could have been a little longer; it would have been helpful. They don't have integration with Microsoft Teams but have with Slack.”

- Vanta Review, Vikrant B., Sep 30, 2022

2. Airbase

Airbase is a spend management platform that allows users to manage all non-payroll spend. It is a great solution for companies of all sizes looking to automate accounting and track real-time spend reporting. The platform gives users control over corporate cards, bill payments, and employee reimbursements all in one system.

What users like best: 

“The visibility and source of truth for all of our expenses. Additional features like international bill payments are also extremely handy and minimize errors. Now they even have a multi-subsidiary feature so you can add all the companies of your group there.”

- Airbase Review, Arianna C., Jul 16, 2021

What users dislike: 

“The overall experience was very good, but I think the error messaging on the declined transactions can be improved. For example, I tried to do a transaction in a foreign currency. Still, the app was declining it, and I only understood that the currency was not supported after I contacted the support team.”

- Airbase Review, Sorin L., Sep 29, 2022

3. Quickbooks Online

Quickbooks Online is a subscription-based cloud accounting solution that lets users efficiently manage their finances online. The platform allows users to keep thorough records, track expenses and profitability, make invoices, collaborate with the accounting team, manage inventory and integrate with multiple third-party applications. It also offers a mobile application available for iOS and Android.

What users like best: 

“QuickBooks Online lets our organization integrate with multiple software platforms, saving us time and money over the long run. I love that I can access our records anywhere, anytime. This is something the traditional downloaded software could never offer, so I always recommend people switch to the online version as soon as possible.”

- Quickbooks Online Review, Andrea M. S., Sep 28, 2022

What users dislike: 

“I don't like that QuickBooks requires so much training in order to use it well and to its full potential. It is helpful that you can use the Bookkeeper option, so they do the bulk of the heavy lifting; it takes a lot off of my plate, which is nice.”

- Quickbooks Online Review, Cambria T., Sep 01, 2022

4. SAP Fieldglass

SAP Fieldglass is a cloud-based vendor management system that allows users to easily manage the contingent workforce. The platform lets users compare labor costs, onboard new workers, and manage them once they are hired. It can also be integrated with other SAP cloud applications for procurement and HR management.

What users like best: 

“There are many good things we can see here, but my favorites are the superb dashboard with lots of information and the candidate handling and submission process.”

- SAP Fieldglass Review, Naresh C., Sep 30, 2022

What users dislike: 

“Nothing as such, only the features can be more user friendly and better UI. Rest everything is perfect and can be easily used by anyone with basic knowledge of the tool.”

- SAP Fieldglass Review, Anshul U., May 20, 2022

5. Venminder

Venminder is a third-party risk management software. The platform provides users with a centralized location to perform third-party risk management programs and better manage vendors and risks. It is an end-to-end solution that enables users to onboard vendors, track contracts, manage service level agreements, keep vendor risk in check, and more. 

What users like best: 

“Venminder is a very robust vendor management program. We've been using Venminder for the last couple of years, and whenever we have an issue, their customer support is top-notch - very responsive and extremely helpful!”

- Venminder Review,  Kori L., Mar 09, 2022

What users dislike: 

“The Venminder platform is very configurable, which is both good and bad. It's good for those who already have experience setting up a TPRM program. But it can be a little intimidating and challenging to set up if you're new to TPRM. Luckily, they have consulting options to get more help in creating a TPRM policy that helps define the criteria needed to set up the Venminder platform.”

- Venminder Review, Phil F., Mar 09, 2022

Make the most out of your vendor relationships 

If building sustainable relationships and increasing those profit margins is your goal, vendor management is the way to go. Make informed decisions with all the vendor-related data on hand and drive real value out of those partnerships.

Don’t forget to check out third party and supplier risk management to avoid data breaches and non-compliance risk factors.