A Complete Guide to Vendor Management in 2024

Creating and maintaining strong relationships with external partners, such as suppliers and service providers, is essential to a successful business venture. 

Suppliers tend to be more comfortable working with a company that treats them well, regardless of their contribution or scope of project. 

When suppliers feel valued, they are more likely to become lifelong business partners that can contribute to a company’s success.

What is Vendor Management?

Vendor management is the process of supporting and empowering vendors through establishing and nurturing long-term relationships with them. The method includes finding and choosing the right vendor in procurement for business needs, controlling the costs and vendor risks, and paying for the services and goods consumed. The term ‘vendors’ also refers to suppliers or service providers.

Look to Software for Smarter Vendor Management

The current state of vendor management that relies on ad hoc tools is fractured and limited. Individual tools used for contract management, vendor onboarding, and even generating analytics, can only take your team so far. These current tools are failing, and won’t be able to keep up with any sizable organizational growth. They are manual, taking up time and opening your organization to the likelihood of errors. They are also siloed, contributing to even more wasted time and workflow bottlenecks. Areas that are ready for software intervention include:

• Contract management – software can help your team stay on top of contract renewal dates with notifications and reminders to renegotiate when it’s time to renew.
• Vendor management – automated systems support an organized vendor database that prevents duplication and centralizes all vendor data. 
• Risk assessment tools – these can help ensure that vendors adhere to industry standards and pay on time, especially when you have multiple active vendors at the same time.
• Payment solutions – software solutions can streamline vendor payment forms and payment processing so your team doesn’t have to handle them manually. 

The next generation of tools address and solve these common issues that come from manual processes. As companies grow and leave these ad hoc tools behind, they are turning to AI and automated processes. These are centralized, and offer far more in terms of collaboration and communication across teams and departments.

To help with the vendor management process, a company can use a software application to manage its vendors in one system. The software, called the vendor management system (VMS), automates vendor selection, hiring, and payment processes. 

Tipalti is an accounting software with a supplier management system that streamlines supplier payment, from filling out information to automated payment processing. Tipalti automation software has integrations with all ERP systems and widely used accounting software. 

Stages of Vendor Management Process

The vendor management process can be broken down into the following stages:

Supplier Selection

For supplier or vendor selection, the company should be able to choose the best vendor among the selection pool in the procurement process. When selecting vendors, the qualifications of each new vendor should meet the company’s standards and be able to help the company achieve its quality and profitability goals.

Supplier Onboarding

After vendor selection, the documentation process starts. This process includes contract negotiation with the chosen vendor, encoding their information in the database through supplier onboarding, and constant collaboration. Onboarding also consists of the actual rendering of service to the company.

Third-party Risk Management and Supplier Monitoring

During the onboarding process, risk assessment is continuously checked to ensure that the vendors meet the requirements and services that the company needs. 

Some of the most common third-party vendor risks include security issues and cybersecurity breaches. These potential risks, which mostly pose a threat to information and data, should also be prioritized by companies. Systems that provide vendor risk management, including risk mitigation processes should be used. 

The vendor management lifecycle is the approach that organizations use to monitor and manage vendor performance and compliance as they go through the supply chain.

Supplier monitoring is also done to guarantee that payments are made on time and with significant cost savings.

Supplier Off-boarding

This is the termination of a vendor’s contract or relationship with the company. This process includes removing the vendor’s data, information, and financial records from the company’s database. 

Supplier off-boarding is done after the project has commenced and payment has been made. Other obligations like warranties, deliverables, equipment returns, and physical access to establishments should also be done and accomplished after.

Vital Roles in Vendor Management Process

A company should hire specific employees to manage an effective vendor management process. These employees are tasked to focus on helping the company secure a healthy supplier relationship to meet the target business goals. 

The following positions play a significant role in the vendor management process:

Contract Executive

The contract executive oversees all the documents needed—the contract, its status, and issues involving the paperwork. This person is in close contact with the vendor manager and the vendor’s account executive or point person. 

Vendor Manager

The vendor manager works under the supervision of the contract executive, executing the vendor management program. This person assists the vendors in some tasks, like quality control and cost budgeting. A vendor manager can either focus on one vendor or a group of vendors with similar services or products.

Positions under the vendor manager are the following:

Financial Analyst

A financial analyst is in charge of auditing, assessing financial data, and monitoring a contract’s business requirements. The person in this role also handles other financial commitments needed for vendor management. They are expected to be knowledgeable about tax laws, economic conditions, and accounting methods.

Performance Analyst

The performance analyst tracks vendor performance to ensure that the vendor complies with the contractual obligations and legal requirements. The position’s tasks include checking the service’s improvement and reporting any financial liabilities that may have been caused by a vendor’s poor performance. 

Administrative Support

The administrative support’s primary task is to protect the company’s interest and ensure that any changes in the contract are still based on the initial agreement. The position also covers the scheduling of the calendar of activities within the contract, including meetings, reports, and other deliverables.

Benefits of Vendor Management

Implementation of the vendor management process and system can bring several benefits to the company. These benefits are the following:

Improved Performance Management

The ability to assess a vendor’s performance can help a company manage risks. This, in turn, can improve the performance of both vendor and company.

Stronger Vendor Relationship

Vendor relationship management is essential in improving collaboration and communication with suppliers. Problems should be appropriately addressed and resolved to prevent them from happening again.

Prime Sourcing and Wide Selection

The company can benefit from a wide selection of vendors to best suit its strategy, budget, and needs. Sometimes, companies resort to a bidding process that weighs in their options for better prices and rates. 

Before the bidding process, companies are required to submit a request for proposal (RFP) to vendors so that the latter can prepare their services before competing with other vendors.

An RFP is a document from the company that states the brief outline and requirements of a project. It is used to solicit bids from potential vendors and determine which vendor is qualified for the job.

Compact Contract Management

The vendor management process and system makes managing contracts better, especially for companies that have multiple vendors. The system centralizes the vendor contracts and other information necessary to the company’s decision-making. 

Accessing all the arrangements and vendor data in one place can be an essential time-saving and cost-effective management solution, especially for the contract executive.

A VMS designed for a smooth and easy management process for companies with several vendors that can get the job done with a few clicks is a must-have solution. Tipalti has that function to collate all vendor data in one hassle-free and user-friendly platform.

Challenges of Vendor Management

There are some challenges that may make the vendor management process difficult, such as:

Non-compliance Risk

Not all vendors can meet the standards set by the company. This risk can be vital if the company only has a limited number of options for its services. 

The company may either cancel the project or hire more vendors to finish it. Either option can be costly.

Low and Bad Reputation Risk

Background checks on vendors are essential to make sure they have enough experience in the field. 

Companies should research vendor information by asking for feedback and testimonials from other clients or vendors.

A due diligence report can be done before hiring the vendor to make sure that no issues will suddenly emerge. This report refers to an investigation or gathering of facts to make sure that a vendor is financially capable and does not pose any risk or threat to the company.

Managing Vendor Price Increases

If you plan to keep using a vendor you have a good relationship with, it’s important to renegotiate your contract terms and keep a lookout for potential increases in costs or changes that are not aligned with your business goals.

Too Many Vendors 

Managing too many or duplicate vendors becomes difficult. Selecting the right vendors from the start is an important step in setting your team up for success.

Limited Data Storage

As many companies have hundreds of onboarded vendors at any given time, keeping track of them and their accompanying information is an important part of the vendor management process. If you receive invoices from vendors you don’t recognize because their names and information haven’t been stored correctly in your system, it will be very difficult to confidently issue payment.

Without VMS, storing and retrieving data may be tedious, especially if dealing with multiple vendors for different projects simultaneously. Investing in a trusted vendor management software, such as Tipalti’s supplier management system, can be a useful management tool for large companies.

Late Payment Risk

Given that not all vendors are the same, their modes of payment and terms might differ from one another. These payment differences may result in delayed payments, which can be one of the primary reasons why business relationships fall apart.

With Tipalti’s Supplier Hub, vendors can check and inquire about their payment status and view their previous invoices and payment history in one tab.

Process and System of Vendor Management 

Applying a better vendor management strategy can help a company manage its vendors better.

SMART Goals

This is the acronym for specific, measurable, achievable, relevant, and time-bound—well-known criteria used to guide any goal-setting procedure. 

Companies should be able to set business objectives before selecting any vendor. This mindset will help the company achieve its desired outcome. The goals will then be a basis for the company in selecting the right vendor for them.

Vendor Selection and Qualification

After setting the goals, it would be easier for the company to narrow down options for potential vendors. The vendor that fits the needs and matches the goals will most likely be the chosen one.

It is also essential to research the vendor, do a little background check about their previous work, and list the pros and cons of each vendor that match the criteria.

Contract Management and Negotiation

Once the vendor has been selected, the company should set terms and conditions that are mutually agreeable to both parties.

Working closely and collaboratively with the vendor can help highlight each other’s strengths and build a solid working relationship.

Onboarding and Supplier Management

Onboarding includes monitoring the key performance indicators (KPIs) and the overall performance of the vendor. 

KPIs are measurable performance values that lead to the company’s goal or objectives. Examples of KPIs are revenue growth, number of new customers, and monthly website traffic.

The VMS can help the company ensure that the metrics are met, while fostering open communication between the two parties.

This process also involves risk management and assessment that may further improve the performance and services rendered by the vendor.

Vendor Management Best Practices, Strategies & Tips

Once the process has been implemented, some key strategies and tips can be used by both companies and vendors to improve their performance continually. 

Vendors are collaborators

Vendors are a company’s stakeholders. Both parties should collaborate and help each meet their goals.

The company should also be able to share the important points and information to the vendor. This strategy will aid both parties to formulate new methods and apply best practices to improve a project’s success rate.

Establish KPIs related to vendor performance

How a vendor works can indicate how the performance metrics KPIs will be met. A company should keep track of the vendor’s progress and quality of service to make sure all KPIs are satisfied.

Identify risks and future-proof

Recognizing risks and always thinking of solutions in advance are foolproof ways to mitigate an impending dilemma or prevent one from happening.

Optimize globalized payments

While there are local suppliers, some projects may require vendors from other countries that specialize in a particular craft or service. VMS enables vendors from across the globe to input their details and process their payments through a system that can benefit both the company and the vendor. 

A seamless supplier system, like Tipalti, allows companies and vendors from different countries to transact and get paid in different currencies without any hidden charges. 

Get the right tools

The right VMS should get all the work done in just a few steps. Tipalti has a secure supplier management system that collects the supplier’s information, validates the data, and processes the payment all in one software. It also reduces payment errors, addressing one of the most crucial issues in a supplier-company relationship. Tipalti AP automation and global payments software performs real-time payment reconciliation. 

Bottomline

Implementing a vendor management system can be an excellent investment and asset for a company. The system can benefit the company’s supplier acquisition and management through its structured features and automated advantages. 

In a  global landscape, a vendor management system should also be considered if the company wants to be competitive. The system allows the company to choose the best suppliers and coordinate with them wherever they may be.

Vendors not only provide services to companies but also maintain the balance of the product supply chain.

Choosing the right vendor management system can be a powerful tool for improving the company and vendor relationship and positively contributing to the entire labor ecosystem’s balance. 

One of the crucial issues in vendor management is the lack of transparency, especially in terms of payment. Vendors will feel more at ease if a system allows them to check their progress, deliverables, and payment status. This transparency issue—together with other problems about compliance, agility, and performance—can be addressed by subscribing to a suitable VMS. 

Choosing the right vendor management system can be a powerful tool for improving the company and vendor relationship and positively contributing to the entire labor ecosystem’s balance. The automated system must include streamlined supplier onboarding through a supplier portal. As your first step to achieving better vendor management, read the white paper.