What Is Vendor Management? Steps to a Smoother Process

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Consider the obstacles in your way of maintaining a streamlined and organized procurement process. More often than not, the recurrent issues that arise have to do with your vendor management process, or the lack of one altogether. Friction with vendors and suppliers is neither your fault nor theirs; it comes down to not have a working, mutually beneficial process in place. A lack of transparency and access to accurate, updated vendor information is holding you back in many ways. Without it, forming and maintaining healthy vendor relationships becomes increasingly difficult. 

Why is vendor management important? We’re going to outline the real benefits of vendor management and how you can implement a process that helps you eliminate risk and headache.

What is Vendor Management? 

The practices put in place to ensure that working with vendors remains beneficial to the business is referred to as vendor management. From researching and sourcing vendors, all the way to issuing them payment, and fulfilling the supply chain, there is a constant process and flow of information. 

What is the role of supplier management? Having an efficient vendor management system in place will help ensure that teams working with vendors in any capacity will always have full transparency into important vendor details. A well-working supplier management process (that includes supplier performance management) will allow them to obtain the goods and services they need faster, and for a better price. 

The Procure-to-Pay Process and Vendor Management

The procure-to-pay or P2P process consists of several steps to ensure the fulfillment of a request for goods or services, and ends with delivering payment for those goods or services. 

In a simplified outline of the P2P flow, evaluating, selecting, and onboarding (or approving) vendors is a major step and the area requiring the most attention and investment after a purchase order is opened.

The P2P process:

Because sourcing and working with vendors or suppliers is such an important part of the P2P process, vendor management specifically can and should be introduced to assist in a major way. Negotiating, as well as maintaining costs and quality, delivery schedules, and industry/company standards are all crucial and often time-consuming parts of the overall P2P process that can be improved by implementing an official vendor management process. 

What is the Vendor Management Process? 

Supplier or vendor management consists of multiple components. Each fulfills a specific role within the cycle and should be completed before the next component can be approached. Understanding each role within the cycle is important to forming a successful vendor management strategy.

A black background with the words vendor data management.

Vendor selection

In order to place an order for a particular good or service, a vendor must be decided on. This means researching and sourcing vendors or suppliers that you believe will be a good fit with your team and your organization as a whole. Many teams have a supplier network or vendor database they can access, or it can be useful to consult with coworkers in other departments who may have experience working with certain vendors in the past. 

Most companies aim to keep working with vendors well into the future, as 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. 

Contract negotiation

After a vendor has been selected and before onboarding a new vendor, a contract outlining the terms of service and payment must be agreed upon. If you are using a vendor you’ve worked with in the past and is already in your ERP, you still need to redefine contract terms and make sure vendor details are up to date. This stage of contract negotiation will set up both parties to be protected and will ensure compliance. A solid contract works to align needs and expectations, mitigate risk, and the potential for fraud. 

Renegotiating contracts falls into this category as well. 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. 

Vendor onboarding

Now it’s time for the selected vendor to be approved by a procurement lead or supervisor. The process of vendor onboarding, also called supplier onboarding, includes verifying vendor information like banking details, uploading documents (including the contract), and having your legal team sign off on the validity of those documents. Once everyone is happy with the vendor status and ready to move forward, the vendor company can be officially onboarded into your system or ERP. 

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. 

Performance monitoring

While you are working with a vendor, whether that means you are waiting for them to fulfill a purchase order or have an ongoing business relationship with them, you will want to monitor their performance. From keeping track of their activity and updates, to making sure they continue to align with your business objectives, performance monitoring will help ensure that a vendor remains a reliable partner. 

Considering vendor performance will also help you make more informed decisions about who to work with for future purchases. It also allows you to better understand which vendors are worth maintaining relationships with, as giving attention to relationship management sets your team up for better deals and payment terms in the long run. 

Invoicing and payments

After receiving an invoice from your vendor you must be able to verify that both the vendor information and invoice details are correct before issuing payment. If you have a solid vendor management protocol in place, confirming this information should be relatively quick and easy. However, if you are struggling to properly store vendor information and keep track of sensitive data, the verification process will be much more time consuming.

Once the invoice is reviewed and matched by either Accounts Payable (AP) or a finance administrator in smaller organizations, it can be routed to an approver and payment can be processed. 

Information management

Modern companies looking to invest in vendor management will also undertake the practice of information, or data management. This refers to keeping an airtight record of all vendor information, usually with the help of an automated software tool. Organizations that work in indirect procurement specifically, will benefit from a software solution that tackles data management and helps users get the best insights into that data. You’ll be able to have the most accurate picture of vendor performance, as well as make more effective and informed high-level business decisions. 

Vendor Management Challenges 

As a defining part of the procurement process, there are a lot of stakeholders involved both directly and indirectly when working with vendors. Naturally, multiple challenges may arise.

Managing contracts 

Keeping an up-to-date and accurate collection of vendor contracts can be tricky. The more vendors you are working with, the more contracts you have to keep on file. Additionally, staying aware of contract dates and renewal deadlines is necessary for successful vendor or supplier relationships and ongoing business opportunities. 

Tracking performance

Staying aware of vendor performance while considering reliability and quality is something that needs consistent attention. It can be easy to miss the signs of poor performance if you don’t have a routine or system in place.

Updating vendor data

Keeping vendor data and sensitive information updated, as well as all stakeholders aware of any updates is important for both past and current vendors. 

Collaborating with AP

Procurement and finance functions will always overlap at some point in the purchasing process. Passing the right information along to AP can be a pain point for many organizations.  

When AP receives invoices, they’ll need the right information to match it to a vendor and issue payment on time. If invoices are coming from vendors who aren’t recognized, or who aren’t stored in your ERP, delivering payment becomes a problem that will be felt by multiple stakeholders. 

Assessing risk

Are your vendors being compliant with company guidelines, contract, and payment terms? Be sure to stay aware of which vendors are demonstrating reliability and trustworthiness. This will let you know who is safe to continue conducting business with.  

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:

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.

The Benefits of Using Next-Generation Tools

Automated vendor management solutions tackle all aspects of vendor management in a faster and less error-prone way. The practices you already have in place to handle data management can be totally accelerated with a modern tool. A centralized vendor database allows involved stakeholders easy access to vital information in a searchable format. Past and current vendors can be researched or monitored at any time — as a full audit of their documents, contracts, banking information, and each action taken is stored and updated continually. 

The centralized and streamlined communication derived from these tools provides a secure and reliable way to approve and onboard vendors, maintain beneficial performance monitoring, and provide the right analytics and insights to make critical business decisions. 

From a company perspective, having an efficient vendor management process in place helps save time and money, helps ensure your organization is working with the most reliable vendors, and helps ensure compliance when it comes to drafting contracts, issuing invoices, delivering payment, and more. From a more operational perspective, procurement teams should look to vendor management to help them gain the visibility and control required to complete a smooth procurement cycle. 

With so many moving parts and stakeholders, procurement leaders need a dependable way to access all vendor-related data and information to make important decisions. They need to approve invoices at the end of the month with the full picture of who approved vendors, booked orders, and signed off on contracts and payment terms. Having all of this information accessible with a clear understanding of how your team is working with vendors makes everything more streamlined and reliable. No more hunting down information or struggling to approve payments without the appropriate context. 

Where to Get Started with Tech

Researching the right vendor management software for your organization doesn’t have to be difficult. Start by outlining the vendor pain points you currently experience, and focus on finding a tool that targets the areas you wish to improve. Keep in mind that a good tool will address your vendor challenges, as well as be able to handle those same challenges as your organization continues to grow. Many solutions offer integration with your existing ERP or other systems, and are quick to set up and deploy. 

Investing in vendor management is an investment in the future of your business. Procurement and finance professional functions, requesters (employees), and vendors all play a role to influence each other. A high-functioning vendor management process will keep each of these stakeholders happy and performing at their best, support business growth, and company reputation.