Introduction
How many businesses do you think manufacture their own products? Only a small percentage – 20%. The major 80% rely on third-party vendors to fulfill their business needs. Every business, whether small or large scale, has multiple vendors. If you are a business that manufactures automobiles, it means you must have multiple vendors from whom you get your raw materials or finished products. Or, if you run a small custom sweater business, you still have multiple vendors for different materials to make a finished product. So, in this scenario, a problem that businesses face is risk-free vendor management. But the shocking part is that only 27% of efforts are actually being put into identifying any risks related to vendors in the course of the business-vendor relationship. This lack of identification severely impacts your bottom line by creating delays, poor cash flow, and customer retention. Therefore, a business must have a proper system to manage vendors in one place to prevent such risks that can directly impact normal business flow and revenue generation.
What is vendor management?
In business terms, vendor management is the process of managing vendors. A vendor is the third-party supplier on which a business is dependent for either raw material or finished goods. Vendor management involves selecting vendors, sourcing goods and services, negotiating contracts, overseeing product arrival timelines, managing costs, and reducing any vendor-related risks.
Vendor management is not something a business can casually ignore. For a business to ensure timely deliveries, quality control, and cost-effectiveness, it must have a system of vendor management in place. A small risk can drastically impact the entire product life cycle and procurement process.
KPI to measure vendor performance
Every business sets its own KPIs when onboarding any vendor. However, there are few that remain intact for most businesses.
1- Return on investment
Return on investment, or ROI, is a financial metric that determines how much money a business generated relative to the amount it invested.
If a business invests a portion of its capital in acquiring a good or service, the return generated from that investment will indicate the ROI generated from a particular vendor.
For instance, if a business buys a vendor management software that costs $10,000 and, as a result, saves $6000 in operational costs, it means the ROI they have generated is 60%.
ROI = (Net Gain / Investment Cost) × 100
In this case:
- Investment Cost = $10,000
- Savings (Net Gain) = $6,000
ROI = ($6,000 / $10,000) × 100 = 60%
The same goes for products. If the business acquires goods from a particular vendor that cost them $30,000 and they sold them for $70,000, it means the business made back their investment plus an additional 133% profit.
Therefore, measuring ROI is important to monitor the profitability of your initial vendor investment.
2- Contract compliance
Measuring contract compliance is an important KPI because it helps businesses identify whether the vendor is complying with the policies or the contract that has been signed by both parties during the onboarding time.
It helps them see the vendor’s efficiency and determine if they are capable of establishing a long-term partnership.
Secondly, it helps them keep checks on risks associated with compliance. They can identify these risks with due diligence and mitigate them before they can largely impact the bottom line.
3- Lead times
Lead time is the duration between placing the order with the vendor and receiving it at your designated location.
Long lead time = delay
Short lead time = smooth supply chain
Measuring lead time helps the procurement and supply chain teams manage the product cycle while preventing delays. If a vendor is not meeting the deadlines set as the lead time, it means the business might face delays that will directly slow down the whole procurement process and supply chain.
This KPI will help you filter out the vendors that are not capable of a long-term partnership, allowing you to make a quick decision about who to onboard next.
4- Product quality
The next KPI is product quality. Every business sets a standard for its products that it can’t compromise on any basis, because a standard sets the tone for a business. One of the major reasons why your customers trust you is that you don’t compromise your product quality. Therefore, if you are receiving more product-related complaints than positive feedback, either from the team or the end consumer, it means the products you are sourcing are not meeting the standards. Consequently, you must decide whether to change the vendor or set a meeting to brief them on your requirements. If they fail to meet the requirements again and again, then it’s time to move on.
5- Pricing
Cost is another major factor when selecting a vendor. Businesses set a budget for everything. You have a budget for goods, services, marketing, operations, and human resources. Based on your budget, you select the vendor that fits within it while also meeting the necessary standards. Therefore, your procurement team evaluates vendors based on value for money. If, after onboarding the vendor, you notice price fluctuations in different orders or if the vendor is not complying with the initial contract, such as charging any unannounced costs not discussed in the contract, then you can initiate a dialogue or consider changing the vendor in the initial months.
The vendor management process
Sourcing and selection:
The first step involves identifying and evaluating potential vendors. In the procurement process, a business evaluates multiple vendors based on quality, lead times, and cost-effectiveness, along with other factors. Every company has a profitability goal and standard based on which it shortlists vendors. When a vendor checks all the boxes that are being set, the company moves to the next step of contract negotiation and vendor onboarding.
Contract negotiation:
After selecting the suitable vendor or supplier, the next step is establishing terms, pricing, and service levels. Both parties discuss their breakevens and non-negotiables in order to set a common ground for partnership. It’s a crucial step because rates might change over the course of the partnership. If you already have a good relationship and a contract that is flexible enough to meet the requirements, like MOQs, then you can create a strong long-term relationship based on trust and profitability.
Onboarding:
After the finalization of the contract, the vendor will be officially onboarded, and the company will integrate it into their systems and processes to streamline everything.
Performance monitoring:
According to the set KPIs, the business will regularly assess vendor performance to make sure it’s aligned with the company standards. Apart from checking the ROI generated over the duration of months and contract compliance, the business also monitors lead times, the quality of the products being received, and whether there are any breaches of contract. Based on that, companies draw official reports. Also, if the vendor is meeting all the requirements against KPIs, then it increases their chances of being added to the list of vendors that are shortlisted as trusted partners. That is beneficial for the vendors because this way, no matter who is in charge of the procurement process, the person or team will know that these vendors are safe to work with, and they can get referrals because companies operating in the same industry trust referrals more than individually selecting the vendor as it poses more risks.
Risk management:
Next step is identifying and mitigating potential risks in the supply chain. But is it possible to identify risks before even starting the partnership? Up to 83% of legal and compliance leaders agreed that they identified vendor-related risks once they entered a vendor-business relationship. This means your work doesn’t stop after you add the vendor to your system. You must monitor your vendor’s performance from time to time to prevent any discrepancies.
Continuous improvement:
If you identify risks that are prevailing, then you can make calculated decisions, like changing the vendor or contract. Therefore, collaborating with vendors for mutual growth is important. Both parties must be looking for long-term success. If at any point you see that your values and performance aren’t aligning, and you are receiving complaints or a significant loss in revenue (which may be due to product quality, lead times, or any vendor-related issue), then you must reconsider your vendor choice.
Vendor management in procurement
Procurement is the process of acquiring goods identified by either the procurement team or an individual. It can include any product, service, or raw material that benefits or maintains ongoing business operations.
Selecting and evaluating vendors also falls under the procurement process. Effective vendor management is important to increase the efficiency of the overall procurement process.
With strategic vendor selection and cost savings, you add smoothness to the overall procurement process.
These two are closely related; vendor management is a subset of procurement.
If you want to understand procurement in detail, click here.
What is vendor-managed inventory, or VMI?
There is this approach used by some businesses, called the VMI, or vendor-managed inventory. In this supply chain agreement, a vendor is responsible for managing the inventory of a seller or a business.
Using this approach might be a good idea if you follow the dropshipping business model or you are a reseller. Vendor-managed inventory helps sellers prevent stockouts, manage inventory levels, and build stronger relationships with vendors and buyers.
How you can 2x your vendor management process
Manual operation can be prone to errors. When it comes to managing multiple vendors at the same time while keeping track of lead times, costs, deliveries, and quality control, it can also be hectic.
Therefore, there are multiple vendor management tools available in the market to streamline and speed up the entire process.
However, companies mostly don’t opt for separate vendor management tools; instead, they integrate them into their existing inventory management tools.
There are inventory management tools that help you manage your multiple vendors simultaneously, such as the Seebiz inventory management software. That helps you evaluate lead times, generate reports, and assess costs associated with each vendor, on automation.
If you have not been managing your vendors up to this point, you might be losing capital without even noticing.
FAQs
What is a vendor?
A vendor is a third-party supplier on which a business is dependent for either raw materials or finished goods.
What is vendor management?
In business terms, managing one vendor or multiple vendors is known as vendor management. It involves selecting vendors, negotiating contracts, onboarding them, managing costs, and eliminating risks.
What is the vendor management process?
It’s a business process of selecting vendors, onboarding, negotiating contracts, managing costs, and mitigating risks related to vendors.
What is vendor management in procurement?
Procurement is the process of acquiring goods and includes selecting vendors as well. Vendor management falls within the procurement process. An efficient vendor management system is important to increase the efficiency of the overall procurement process.
What is vendor management in inventory?
In inventory management, vendor management refers to maintaining suppliers responsible for providing you with goods and services, along with relationship building. It’s an important part of inventory management because the selection of good vendors that meet the standards of a business directly impacts business operations and the bottom line.
What is vendor-managed inventory, or VMI?
It’s a supply chain agreement where a vendor is responsible for managing the inventory of a seller or a business. Mostly, sellers that do dropshipping or acquire finished goods use this approach. Vendor-managed inventory helps sellers prevent stockouts, manage inventory levels, and build stronger relationships between vendors and sellers.
