Senior Writer: Sindhu Bharathi
Whether it is a multi-national organization or a small business, vendors and their supplies play a crucial role in their success. Managing vendor relationships effectively helps businesses improve transparency, save time and cost, and ensure the timely delivery of services to their customers. An organization may have several vendors, and not all of them can be handled under a single strategic umbrella. This calls for a comprehensive vendor management plan, thoughtful strategy, and efficient implementation.
This blog helps understand what vendor relationship management is and presents some of the key benefits and best practices in vendor relationship management. It also covers the steps organizations should follow in developing a robust vendor management strategy.
What is Vendor Relationship Management?
Before endeavoring to understand vendor management, it is important to understand who a vendor is from the perspective of a business. Vendors can be individuals or organizations serving a single-time need of a business or a long-term partner to the business.
Following are some examples:
- Individuals who sell their services to meet a single-time need of an organization. For example, a company may hire a web developer to build a website for their organization. This is a one-time project, and they work on a contractual arrangement.
- An organization that sells raw materials, equipment, parts, or components. For example, an IT hardware manufacturer may hire a company that manufactures semiconductor inputs as a vendor.
- All others who supply goods or services to an organization. This includes office supplies, consulting services, and other goods and services.
Vendor relationship management is the process of initiating, building, maintaining, and evaluating relationships with vendors who help the organization achieve its business needs and goals.
More precisely, it involves a series of steps right, from identifying the right vendor, negotiating prices, measuring the work, and evaluating the vendor’s performance while ensuring on-time payment and a positive relationship. The person or employee who monitors the entire process from the procurement team is designated as the vendor manager.
An effective vendor relationship enhances the quality, reduces the Total Cost of Ownership (TCO), and ensures a seamless flow of activities within the organization.
What is the Difference Between Vendor Relationship Management and Vendor Management?
Though vendor relationship management and vendor management have the same objective, ensuring a seamless flow of business activities, the former has a strategic intent, and the latter is related to operations.
Conventionally, vendor management is about price negotiations and contracts, while vendor relationship management takes a broader perspective and has a holistic purpose.
What are the Best Practices in Vendor Relationship Management?
Vendor managers and procurement teams are always looking for constructive strategies and best practices to manage their vendors efficiently. Following are some of the vendor relationship management best practices that organizations have tried and tested in their endeavor to maximize the value delivered by vendors.
1. Measure performance
Having a comprehensive system in place to measure the performance and evaluate the quality of service rendered by vendors is one of the vendor relationship management best practices adopted by leading organizations worldwide. They set clear goals and expectations and evaluate the performance of the vendors based on mutually agreed-upon KPIs. This ensures the accountability of all the vendors in the system.
2. Do annual vendor scorecards that include KPIs
Vendor scorecards measure the performance of vendors against the Key Performance Indicators (KPIs), preset goals and objectives of the business. Akin to the customary practice of holding performance appraisals for employees in an organization, vendor scorecards evaluate the performance of vendors.
Vendor Relationship Management (VRM) software collects real-time feedback about the performance of the vendor from the stakeholders. The vendor manager shares this feedback with the vendor and discusses the performance against the KPIs.
A CIO study presents four balanced elements that organizations consider when they set their metrics and KPIs for scorecards. They are as follows.
- Customer retention & satisfaction.
If there is critical feedback at any time during the year, the best solution is to resolve it immediately with the vendor. Some organizations have the habit of seeking a reverse scorecard where they let the vendor evaluate the procurement team and other stakeholders in the organization. Using scorecards as a medium to evaluate the performance of both parties involved creates a space to identify the concerns, undertake corrective measures, and build a deeper relationship.
Supply chain processes are highly vulnerable to risks and uncertainties. There are chances that the prices and demand may fluctuate, leading to losses that may adversely impact the vendor, organization, or both. Investing time and effort into mitigating these risks and uncertainties is one of the important vendor relationship management best practices.
A well-thought-through vendor management relationship strategy enables Vendor risk sharing to reduce the uncertainties involved in the process. This would ensure a win-win relationship for both the vendor and the organization and helps in managing vendor relationships effectively.
4. Be as transparent as possible
Many organizations involve vendors in strategy building, research activities and innovation planning. There exist limitations when it comes to ensuring security and confidentiality. The same is the case with vendors as well.
So, organizations with the best vendor management practices go beyond formal boundaries and are built on mutual terms of the trust, support, and empathy. They thrive upon transparency and understanding and this plays a key role in managing vendor relationships.
5. Build trust
Long-lasting vendor relationships are built upon trust. An HBR study shows that trust between the vendor and organization plays a major role in achieving a resilient supply chain. When vendors are bound by emotions, they are more like to bond deeper and stay in a longer commitment to the organization. In organizations with efficient vendor relationship systems, the vendors turn out to be long-term partners.
What are the Key Benefits of Vendor Relationship Management?
Manufacturing and service organizations of today work with a lot of vendors. A constructive vendor relationship enhances the organization’s overall efficiency while reducing the time, costs, and risk involved.
Following are some key benefits organizations can achieve with an efficient Vendor Relationship Management (VRM) system.
1. Accountability and transparency
An efficient vendor management system ensures greater transparency in the process. When expectations and requirements are clearly communicated, the parties involved become accountable. Vendor management software facilitates room for feedback and evaluation against a pre-determined set of KPIs, which helps avoid confusion and conflicts.
2. Lesser risk
With an inefficient vendor management process, there are higher chances for chaos and confusion. This leads to higher vendor turnover and attrition, which in turn increases the cost and impacts the reputation of the organization. Meaningful communication and transparency in a vendor relationship help the organization and the vendors mitigate the risks and uncertainties inherent in the supply chain.
3. Stronger communications
An important advantage of having a proper vendor management system is that they create space for communication and transparency in the supply chain. They also allow the organization to customize its mode of communication with the vendors. In the case of simple projects, a phone call works, while in complex projects, they may agree to do a presentation periodically.
How to Manage Vendor Relationships in 10 Steps?
This section presents some steps organizations follow to build and maintain long-term vendor relationships.
1. Select the Right Vendor
The very step in vendor relationship management is to select the right vendor. The vendor’s policies, work culture, and values should align with your organization. More importantly, your customers should accept the vendor. So, to select the right vendor, you should evaluate their key processes, communication, reputation, level of transparency, and so on.
2. Invest in Vendor Management Software
Vendor management software allows you to manage the data, track information flow, and ensure proper communication with all your vendors. The Vendor Relationship Management (VRM) system also allows the procurement teams to evaluate the performance while enabling timely payment. Most SaaS software platforms function as self-service portals so vendors can access the data and information at any time. This reduces the complexities of managing vendor relationships.
3. Establish Clear Expectations
When you don’t have a platform to communicate your expectations clearly to the vendor, there are chances for misconception. This eventually leads to confusion and problems. So, always make sure that you convey the requirements and expectations clearly in the vendor contract. This could be seen as a reference when there is a need to resolve conflicts and settle down problems.
4. Communicate Challenges Quickly
An efficient vendor relationship management ensures transparency and enables rapid resolution of communication challenges. Because an organization has many vendors, it is important to maintain an open line of communication with each of them. Solving communication challenges paves the way for a long-lasting vendor relationship.
5. Focus on Collaboration
Vendor relationships are built upon trust and emotions, and you should focus on strengthening the collaboration all the while. Problems are unavoidable, and a lot of times, they are unintentional. Focus your time and effort on solving the problem and deepening the collaboration. Always remember that the stronger the collaboration is, the better their performance is.
6. Automate Processes
Organizations should leverage technological advancements and automate as many processes as possible. A lot of steps in vendor management involve mundane activities. Automating these processes reduce employee burnout, manual error, and overall costs.
For instance, without an automated vendor relationship system, the vendor has to wait for payments, approvals, and negotiations that, slow down the process. An automated system reduces these bottlenecks and improves overall productivity.
7. Reevaluate Relationships
Make it a point to evaluate vendor relationships periodically. When businesses grow, their needs change. So when you scale your business, you need a vendor who can cater to their increased demand. This requires that you assess the intensity of alignment with vendors once in a while, at constant intervals. Check if their prices are competitive. Also, evaluate the performance and make sure that it keeps improving.
Make it a point to update your vendor about your business model and roadmap. This would ensure that they stay in alignment with the business. Vendors can better plan their business so they can ensure the timely delivery of services and avoid delays.
9. Support Your Vendors
Building an empathetic, emotional bond with the vendor is important. Beyond supporting them financially, you can do small things like referring them to a potential business owner. You can also review them on social and professional platforms. Small gestures like testimonials add great value to the relationship. So, always make it a point to support your vendor’s business in whatever way you can for a mutually beneficial collaboration.
10. Diversify Vendors
One way to achieve a resilient supply chain is to diversify the vendors. Having many vendors creates a greater space for negotiations. This would also reduce dependency on one or a few vendors. Diversifying the vendor base will help you avoid delays, seek the best prices and aid in managing vendor relationships.
Whether you are looking to build vendor relationships from scratch or you intend to strengthen the existing relationship, an effective vendor management tool is the key. Automated vendor relationship management systems streamline the processes while ensuring proper communication and a transparent system.
Using manual methods to manage vendors can be complex and cumbersome. Organizations can build a mutually beneficial collaboration by using the right set of tools and leveraging vendor relationship management best practices.
Vendor Relationship Management FAQ's
Vendor relationship plays a key role in driving a business toward success. Having a positive vendor relationship helps businesses build a resilient supply chain, achieve better quality, save costs and avoid delays in delivery. On the other hand, when businesses fail to build a constructive relationship with vendors, it leads to miscommunication, higher lead times, increased vendor turnover, higher costs and so on. This creates confusion and chaos, adversely impacting the organization’s productivity.
Ensuring transparency in communication, using automated vendor management tools and software, sharing the roadmap of your business with the vendors, measuring performance using annual vendor scorecards, and supporting the vendors through testimonials and reviews helps organizations deepen their relationship with vendors.
The main responsibility of the vendor relationship manager is to facilitate a deeper collaboration and foster a positive relationship between the organization and its vendors. They invest their time and effort into negotiating with the vendor, establishing contracts, setting KPIs and other metrics, evaluating the vendors periodically and offering constructive feedback. The manager also works out strategies to mitigate the risk involved in the vendor relationship management process.
Vendors refer to those individuals or businesses from whom the organizations purchase their supplies. Customers, on the other hand, refers to those who consume their supplies. Vendor relationship management is about streamlining the entire chain of activities between the organization and vendors.
The main objective of the vendor relationship management system is to mitigate the risks inherent in the supply chain, control costs, avoid delays, and ensure that the vendors are aligned with the roadmap and objectives of the organization. On the other hand, customer relationship management refers to those principles and values that dictate the interaction between the organization and its customers.