If you sell online or in brick-and-mortar stores, then you’d know how important a vendor is to the success of your business. From needing a wholesale dropshipping supplier for your dropshipping business to learning how to find wholesale suppliers for your eCommerce business, knowing vendor management best practices is critical.
Key Takeaway: Vendor management is important when working with numerous third-party vendors and wholesale suppliers. The rigorous process of negotiating wholesale vs retail prices and ensuring that your vendors supply the right orders on time requires the right skillset and understanding.
Managing vendors is not an easy task. This article aims to enlighten you on vendor management best practices. Let’s get started.
What is Vendor Management?
Vendor management involves building, strengthening, managing, and maintaining mutually-beneficial supplier relationships to drive efficient business systems. In addition, vendor management best practices help businesses get the maximum value from their vendors.
Communicating with vendors, evaluating their performance, and minimizing any risks they might pose to your company are all examples of supplier performance management best practices. Collaboration and full transparency should be used to manage vendor relationships.
The success of your vendor relationships will determine how well your business performs. It will be challenging to cultivate third-party relationships and make sure commitments are being performed to an acceptable standard if you don't grasp the state of your current vendor base.
Running a successful business requires developing strong vendor connections. However, managing vendors requires you to keep track of a lot of different things because there are many moving pieces.
When purchasing goods and services, vendor management strategies and best practices reduce waste and boost productivity. A vendor management plan creates a structure to develop policy, create and track eCommerce KPIs, promote collaboration, and reduce risk.
In order to get the most out of suppliers over the course of their contractual relationship, businesses must manage their vendors in a way that minimizes risks, controls costs, and fosters service excellence.
In spite of the fact that this intricate business activity involves numerous components, good vendor management should always take the following factors into account:
- Vendor sourcing: The first step in this procedure is to find the best vendors who match the description of the particular goods or services that your company requires. Viewing social media accounts, eCommerce marketplace, wholesale directories, and eCommerce websites will help you conduct research.
- Contract negotiations: After identifying prospective possibilities, you will normally request bids from them using RFPs (request for pricing) and RFQs (request for quotation). In addition to their prices, you should examine and assess vendors based on things like their security procedures, standing, capability, and capacity for efficient communication.
- Onboarding: The process of onboarding begins after choosing a vendor. It entails gathering the necessary data to accept a firm as a supplier, allowing your company to buy products and services from that company.
- Monitoring vendor performance: To make sure that your vendors adhere to your organization's standards, you must define metrics for evaluating vendor performance. You can either choose to work with a vendor again based on their scorecard, or you can look for another one.
- Risk assessment: Assessing potential hazards that can harm your business is part of vendor risk management. This covers everything from data security, PCI compliance difficulties, infringements on intellectual property, lawsuits, and more. Businesses should have strategies in place to reduce this risk because outsourcing projects to outside providers entails an elevated security risk.
- Processing payments: To maintain a positive working relationship with your suppliers, you must pay them promptly after receiving goods and/or services. Invoice management and invoice processing are important aspects of payment processing. You can use payment processing software like BlueCart to manage vendor payments.
- Pricing: If a vendor's prices go over your allotted budget, it means they're not a good fit. It's important to explicitly lay out and check on both sides of the agreement information including billing frequency, rates, and payment methods.
Manage and track your multiple vendors and streamline the entire procurement process. Download our free easy-to-use Wholesale Vendor Management Spreadsheet Templates.
Top 7 Vendor Management Best Practices
Utilizing vendor management best practices will help your business refine its present approach and achieve the best possible results. You can improve your connections with third parties, extract even more value from your current vendor base, and get off to a good start with new vendor relationships by putting the best practices listed below into effect.
- Set Clear Vendor Management Policies
A document that advises senior management and the board of directors of a corporation about vendor management procedures is called a vendor management policy. The basis for an effective and strategic vendor management practice is a thorough vendor management policy.
The factors that promote risk reduction, innovation, cooperation, and vendor diversity should all be part of a successful vendor management policy. The following is a list of guidelines to follow while drafting a vendor management policy:
- Establish a Purchasing Committee: The committee should include a unit manager, a vendor manager, and other interested parties. The committee should regularly discuss policy, evaluate performance, and refocus in response to evolving circumstances.
- Name the Responsible Parties: A general description of the department's operations, who is accountable, and board and senior management monitoring requirements should all be included in your policy.
- Formal Document Writing: Create the vendor management policy as a formal document. It is a clear strategic framework. The policy is approved by management, and it should specify how you'll update the board of directors and senior management.
- Align Your Business's Purchasing Strategy with Your Overall Strategy: Executives are aware of the importance of procurement in today's fiercely competitive global market. To launch and sustain new product or service innovations, management anticipates that the purchasing department will cut costs and encourage vendor collaboration and interaction.
- Reach the Optimal Vendor Count: In light of the metrics and objectives you establish, try to have the right or ideal amount of vendors. You should take market dynamism, your requirements, and risk concerns into account while determining that perfect amount. Once you've done the math, your vendors can give you a competitive edge.
- Develop a Vendor Selection and Review Process: Define criteria that are appropriate for your business. Next, create the auditing requirements and organize site visits.
- Identify the Guiding Principles for Risk Assessment: It is important that you evaluate the financial, legal, and information security risks for each vendor. Look for independent documents, such as tax returns and bank statements, to confirm a vendor. You may require either a professional risk assessor or a risk assessment committee, depending on the size of your business.
- Choose the Metrics You Want to Track: Key performance indicators should be used to define what you wish to track (KPIs). In addition to qualitative observations or additional contextual elements, measurements should include data that can be collected and measured objectively.
- Clarify Vendor Responsibilities
Ensure that your vendors understand their roles and responsibilities. This is where a vendor contract comes into play. A vendor contract is a document that clarifies what you expect from a vendor or wholesale supplier.
The type of the product or service, the quantity supplied by the vendor, and the terms under which the vendor offers the product or service are all specified in the contract.
If either side fails to deliver on the agreed-upon terms, a vendor contract also allows for resolution. The following are some examples of vendor contract best practices:
- Guidelines for Policy Documents: When creating contracts, abide by the rules of the vendor management policy.
- Scope of Work (SOW) or Service-Level Agreements (SLA): Although the draft policy document you prepared covers your broad guidelines, you must also add vendor-specific agreements that go into the specifics to avoid problems in the future. Vendor obligations are set up in SLAs or SOW documents.
- Expectations for Information Sharing: As part of your agreement, you must exchange information and priorities with vendors in order to collaborate. Your vendor's strategy, plans, goals, areas of difficulty, organizational information, and technological stack should all be included in this material.
- Payment Arrangements: The contract should outline the prices for the goods or services, the recipients of the payments, and the consequences of late payments.
- Requirements for a Fourth Party: In order to deliver goods or services, vendors sometimes subcontract work to other suppliers. Make sure your third-party vendor identifies any fourth-party subcontractors and keeps track of that party's adherence to contract terms in order to proceed with confidence.
- Choose the Right Vendors
Strategic sourcing is the key to identifying the finest suppliers for your company. The performance of your business as a whole and competitive advantage in the market are continually improved by great vendors who offer high quality service at a reasonable cost.
When choosing a vendor, make sure that you do your background research. Check the vendor’s social media pages and website. Ensure you confirm their wholesale licenses are authentic as well.
Another thing to check when selecting vendors is their expertise. Choosing vendors that are expert in the niche market will be advantageous to your business. For instance, expert vendors will be knowledgeable about the right bulk shipping conditions, best warehouse management tips, and how to ship wholesale foods.
- Measure Vendor Performance and Metrics
Vendor performance KPI, or key performance indicator, is a quantifiable value that monitors vital vendor performance, capacity, and compliance areas. These KPIs enable data-driven ways to managing vendors when they concentrate on strategic sourcing, low risk, and high value for the buyer.
KPIs encourage a purchasing team's utilization of suppliers, control over the supply chain, and adjustment-making processes to be continuously improved. You can adjust your plans as necessary, based on KPI data, to achieve your company's goals and objectives.
- Improve Vendor Communication
A key component and strategic vendor management best practice is developing and keeping strong relationships with your vendors. Vendor relationship management is a significant component of vendor management.
Maintaining positive ties with suppliers is essential to achieving a successful collaboration that benefits both organizations directly. This entails giving and receiving candid feedback and remaining adaptable throughout the partnership, particularly when negotiating costs or handling unforeseen problems that may develop.
When describing your expectations and demands, it's critical to be as honest and detailed as you can. Your vendors should follow suit to prevent misinterpretation.
- Set up Risk Mitigation Strategies
Businesses should always think about how they can reduce any kind of third-party risk when implementing a vendor management plan. If your company is more reactive than proactive when it comes to risk, you might be discovering that the problems at hand can no longer be solved.
Risk mitigation and sustaining business continuity all depend on visibility and quick response. Nobody likes to consider dissolving a partnership before it really has started, but crucial vendor partnerships are an exception.
The vendor lifecycle includes an exit strategy, therefore pay particular attention to the language in your contracts. Having an exit strategy is a best practice that can help you avoid a business disaster.
- Use Vendor Management Software
The way you onboard your vendors might make a positive or negative impression on how you will work with them in the future. Manual processes that are overly time-consuming, back-and-forth for data gathering, or that are challenging for vendors to follow can lead to early irritation, raise the risk of delay, and even introduce vulnerabilities due to inaccurate data.
Vendor management systems (VMS) give businesses a centralized location for managing communications, projects, and payroll. From selecting a vendor to submitting timecards and sending paychecks, vendor management systems manage the complete vendor relationship.
VMS integrates vendor/contractor payments, expenses, and contracts while offering efficient channels for communication and task management features. Vendor management software can be implemented to the advantage of all business sizes, sectors, and divisions that use vendors. These tools offer robust, cloud-based solutions that boost productivity and communication.
Frequently Asked Questions About Vendor Management Best Practices
Let’s answer a few simple questions about vendor management best practices.
What is Vendor Management Strategy?
A vendor management strategy are actions taken to actively maintain relationships with third parties and has at least one overarching goal. Communicating with vendors, assessing their performance, and reducing any dangers they can pose to your company are some of these processes.
What is Vendor Management Lifecycle?
Vendor lifecycle management is a transparent and structured approach to managing vendors. By valuing and including suppliers in the procurement strategy, vendor lifecycle management puts them at the center of an organization's procurement process.
What is Due Diligence in Vendor Management?
Vendor due diligence refers to the process by which a company assesses the risk posed to its business operations by a present or potential vendor. A crucial element of vendor management, which is mandated by federal law, is vendor due diligence.