What is vendor management?

Vendor management describes the processes used in managing suppliers, including researching and selecting vendors, negotiating contracts, and more.

Vendor management is a broad banner, encompassing essentially all of the activities that an organization may engage in when interacting with its suppliers. These activities may include vendor sourcing and appraisal, contract creation and agreement, KPI and goal establishment, tracking, reporting, reviewing, security testing, risk mitigation, and dispute resolution.

Depending on its specific industry, focus, and customer base, a modern organization may work with potentially hundreds of vendors across a diverse range of markets. Each of these vendors must be approached as a unique entity, carrying with it its own pay rates, contract terms, and points of contact. As such, managing these vendor relationships can be an extremely complex task.

Vendor management organizes these relationships, providing companies with tools and other resources for selecting and working with vendors to meet unique business needs. And while vendor management is clearly focused on improving vendor selection and ensuring supply chain consistency and reliability, when properly utilized it can lead to many other advantages as well.

There are a range of benefits to improving and managing supplier relationships. Here, we further explore several key advantages of incorporating an effective vendor management solution.

Improved vendor selection

Incorporating clear business criteria and providing a centralized location in which to compare supplier information, vendor management gives organizations the reliable data necessary for choosing the best-possible vendors to meet their needs.

Reduced operational costs

Manually managing every supplier can be extremely time consuming and labor-intensive. Vendor management not only streamlines the entire process, allowing businesses to reduce the time spent on individual vendor-transaction lifecycles, but also tracks supplier performance against established service level agreement (SLAs). Finally, the vendor management can help reduce additional recruiting and training costs while also eliminating rogue spend. Together, these advantages mean improved productivity on both sides, and fewer costs.

Faster vendor onboarding

If not properly conducted, vendor onboarding can negatively impact productivity and increase operational costs. Vendor management speeds up the entire onboarding process, helping businesses capture and organize relevant vendor information for faster, more-accurate supplier approval.

Enhanced reporting and analytics

Properly applied, vendor management brings all relevant vendor data into a single platform. This not only assists in organizing and managing vendors, but it also makes valuable process and operational data available for analysis. With advanced analytics and reporting options, organizations can more easily detect and anticipate needs, opportunities, and potential issues.

Decreased risk

Unfortunately, sometimes vendors simply do not meet expectations in terms of performance or compliance, creating inefficiencies, delays, and potentially-damaging legal issues. Vendor management provides a resource in which businesses can automatically store and review vendor performance, allowing them to cut ties with suppliers who might pose future risk. On the business’ side, vendor management can help ensure that all vital paperwork is completed, proper approvals are detailed and followed up on, relevant changes and licensing requirements are being brought to the right people, and that a clear audit trail is always available.

Better supplier relationships

A large part of managing vendors is building productive working relationships. Vendor management keeps every aspect of every vendor relationship fully organized and easily available to authorized individuals within the organization. As a result, every vendor can be managed on a more personal level, with the right attention paid to essential details, no matter how many vendors the organization works with overall. And, by improving supplier relationships, companies can often negotiate for better rates.

To help achieve vendor excellence, there are several vital metrics that must be closely monitored. This includes the following:

Spend visibility

How much money is an organization spending with each vendor annually? Improved visibility into spend can help businesses identify areas where they may be applying resources without seeing the associated returns.

Vendor segmentation

Often, organizations will categorize vendors into the following groups: Key vendors (high-value; single-source), important vendors (mid-value; multiple-sources), and tactical vendors (low-value; many-sources). Seeing each vendor segmented and quantified helps provide a more-clear idea of which vendors are essential and which are not.

Collaboration

The more closely vendors are willing to work with their clients, the better the results. Although collaboration can be a difficult metric to quantify, organizations may choose to take into account the number of supplier contacts, along with how often business reviews are conducted.

Risk management

Are the materials being produced and delivered in compliance with established regulations and industry standards? Keeping track of non-compliance issues can provide greater insight into the risk represented by a particular supplier.

An effective vendor management process consists of seven individual steps.

1. Determine needs and responsibilities

Before making any formal agreements with suppliers, the first step in vendor management is determining business needs and goals. With clear goals in place, requirements of relevant business units can be established, possibly including creating a dedicated vendor management team. This will help ensure full adoption, and eliminate the risk of duplicated effort.

2. Select vendors

With businesses needs and responsibilities firmly established, the next step is to begin considering vendors. Establish selection criteria for evaluating potential vendors, including cost and non-cost factors. Assess any submitted proposals, and consider the scope of work, pricing, renewal dates, and any other important factors. The evaluation process should be as comprehensive as possible to ensure the best possible chance of working with only top-quality vendors.

Graphic lining out the vendor management process.

3. Negotiate contracts

Traditionally, contract negotiation has fallen to legal, finance, and sales teams, with the business units who will fulfill on the contracts only becoming involved once the agreement has been finalized. Effective vendor management instead brings these units into the negotiation process much earlier, including all relevant stakeholders in the early decision-making processes. Contract negotiation will define the goods and services being provided, as well as start and end dates.

4. Onboard vendors

After contracts have been negotiated, the selected vendors must be set up as approved suppliers within the company systems. This includes collecting documentation, approvals, and other details, such as relevant licenses, insurance details, and tax information. Adequate onboarding helps maintain compliance standards, and ensures that the supplier can be legally paid for their service.

5. Maintain ongoing operations

As the organization begins to do business with the vendor, they must keep a close eye on results. Comparing vendor performance against established KPIs, and identifying and resolving potential issues before they develop into problems will help ensure consistency and reliability in supply chains.

6. Monitor performance

Going hand in hand with the previous step, monitoring performance helps organizations identify potentially-damaging vendor risks, such as data security weaknesses, lawsuits, and compliance issues. Vendor performance can disrupt vital operations and damage a business' reputation, making this step an important part of proper vendor management.

7. Close out/renew contracts

As current contracts reach their end dates, effective vendor management provides a clear path and proven processes for closing out or renewing contracts. These processes must be followed to ensure strict compliance and protect the business and the vendor from subsequent legal repercussions.

Because ‘vendor management’ is such a broad term, the range of available vendor management systems—and their capabilities—is likewise expansive. When choosing a vendor management system, consider those that provide the following capabilities:

Cost control

One of the primary advantages of vendor management is increased cost control. This can be established through improved ability to identify opportunities, eliminate redundant or unnecessary expenses, narrow down supplier options, and negotiate better rates.

Benefits realization

The supplier relationship exists to provide results. As such, it is important to keep the terms of the vendor contract firmly in mind, so that organizations can continue to drive their suppliers to deliver on their promises. At the same time, vendor management functionality that streamlines internal processes helps businesses reach their goals more quickly and consistently.

Supply chain resilience

Unexpected supply chain disruptions can create significant problems for organizations and vendors. Supply chain resilience solutions help maintain an ongoing dialogue with suppliers, allowing both parties to work together to identify and assess risks, and plan for contingencies.

Compliance Management

Regulatory standards exist to ensure that businesses act in a way that is supportive of the continued happiness and safety of their community. This includes providing quality services and products, being honest with customers and audiences, and promoting ‘fair play’ within the market. Compliance management helps ensure that the organization is up to date and fully compliant with all relevant federal, state, and local mandates.

Risk management

Risk management gives organizations the information they need to identify and prioritize potential future events that might impact their business. They can then take action to mitigate and control any predicted negative outcomes.

In the modern business environment, correct management of third parties is more than just an advantage; it’s a key to success. But along with the many advantages of partnering with other organizations come increased risk. ServiceNow Risk Management, built on the award-winning Now Platform, helps mitigate these risks by providing essential context, real-time monitoring and reporting, and reliable risk-management processes, all backed by advanced automation capabilities. And, by bringing all relevant vendor and risk information together into a single database, Risk Management offers unparalleled transparency and control across the entire vendor ecosystem—all managed from customizable, intuitive dashboards.

ServiceNow is taking the risk out of risk management; learn more about ServiceNow Vendor Risk Management, and see how far effective vendor management can take you.

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