A Practical Guide to Vendor Management (2024)

Vendor management came into practice in 1983. It kick-started when McKinsey consultant Peter Kraljic urged corporate buyers to move away from purchasing towards effective supply and supplier management. And, his observation was proved right by supplier management horror stories like the massive Boeing 787 delay.

Vendors are at the heart of any organization’s procurement process. However, several organizations tend to overlook the importance of establishing a good relationship with their vendors. This act of negligence might not have made a difference when procurement played an administrative role in purchasing goods/services for an organization.

Now that procurement teams have stepped on to a business co-creator footing, effective partnering and collaboration with vendors is indispensable. Gone are the days where you could manage spend through better negotiation. Outdated vendor management practices are no longer sufficient to address the existing procurement pain points.

Here’s all you need to know to create an effective and efficient vendor management process.

What is vendor management?

Vendor management enables an ongoing development of third-party vendors through frequent collaboration and constant monitoring. It involves working with your vendors as a team to draw up mutually beneficial contracts that ultimately strengthen both businesses. It prioritizes establishing a long-term vendor relationship over short-term gains.

Strategies to implement successful vendor management

Most businesses have some process in place to manage their vendors, but there may still be some room for improvement.

Here are five vendor management strategies employed by procurement leaders around the world to optimize vendor spend and improve vendor performance.

1. Risk management

Vendor risk management is the process of identifying, assessing, mitigating risk in an organization’s supply chain.

Best supplier risk management practices monitor vendors actively and have a contingency plan in place to address every type of risk (strategy, implementation, and performance). With the pandemic, there is an increased risk in supplier management and a great way to deal with it is to automate your procurement process

2. Spend visibility

Transparent vendor spend management will eliminate hidden costs and indirect spends. However, tracking the amount spent on each vendor manually can be a time-intensive task.

By implementing an automated procurement system, organizations can inject transparency into the procure-to-pay process.

3. Vendor segmentation

Vendor segmentation is the process of mapping suppliers against profitability and exposure to risks. Small and medium businesses with small supplier bases prefer to use a simple process like the Deloitte priority model.

On the other hand, most enterprises with large supplier bases and mature supplier relationship management practices prefer to use the Kraljic Matrix method.

The Deloitte priority model classifies vendors into three groups (strategic, important, and transactional) based on business criticality. The Kraljic Matrix maps suppliers into four groups based on two key dimensions: risk and profitability.

4. Vendor collaboration

According to a recent Global CPO survey, 23% of CPOs are focusing on supplier collaboration activities. Fruitful vendor collaborations can not only fortify the buyer-vendor relationship but also deliver tangible benefits (value and cost savings) for both parties.

Although emails and messengers enable real-time communication, they are not the most efficient tools for the job. Cloud-based digital vendor management tools help organizations create a supplier network through enhanced visibility and collaboration.

5. Vendor performance management

The process of measuring and analyzing vendor performance helps organizations save money, mitigate risk, and drive more value out of the contract.

The key to this practice is creating a centralized data repository with all vendor-related information. Businesses use a variety of tools from paper forms to spreadsheets and vendor management solutions to store and manage their vendor data.

Digital procurement tools that come with an inbuilt reporting module make the vendor performance management process a breeze.

Stages involved in vendor management

The vendor management life cycle can be split into five major steps:

Step 1: Vendor qualification

The first step of vendor management is determining whether or not a vendor has the expertise and capability to fulfill the business need.

There are two types of vendor qualification: pre-qualification (for potential vendors) and re-qualification (assessment of active vendors).

Step 2: Vendor onboarding

Approved vendors are then onboarded into the organization’s database. This stage involves the process of collecting, capturing, and storing all relevant vendor information in a centralized database.

Step 3: Ordering and delivery

Typically, either a purchase order or a contract initiates the order process. The specifications are listed out clearly in terms of reference (TOR) or (SOW).

Once the order is fulfilled, the received goods/services are subjected to a quality check and the vendor’s performance is evaluated.

Step 4: Vendor payment

After receiving the goods/services, the buyer needs to match the invoice with the related purchase order.

If everything seems to be in order, the invoice is approved and forwarded to finance for payment processing. In the case of discrepancies, the invoice is rejected back to the vendor.

Step 5: Vendor offboarding

When a contract ends or a long-term vendor relationship terminates, it is critical to remove the vendor from finance and administrative records.

Failure to do so might result in compliance breaches, loss of valuable organization time and costs.

How a cloud procurement solution can transform vendor management

Manual tools complicate this already complex business process. By implementing a procurement solution, organizations can develop a structured supplier relationship management process that controls costs and reduces risk, all while maintaining quality.

Comprehensive tools like Kissflow Procurement Cloud help users by offering a digital tool that captures high-value data and auto-populates captured information across other procurement functions within the procure-to-pay cycle.

Here are some notable benefits these solutions can offer to the vendor management process:

1.Easy vendor onboarding

Register vendors quickly and easily, use multilingual catalogs, and access vendor information instantly

2.Comprehensive vendor rating

Rate vendors using key performance metrics like policy compliance, delivery quality, timeliness, and more

3.Vendor self-service

Give vendors the ability to easily update their information, and get alerts on order and payment details

4.Quick vendor screening

Retrieve and verify supplier data like business reports, financial and credit risk data

5.Corrective actions

With sub-par supplier performance, initiate corrective action plans (SCAR) or offboard them

Core functions of a comprehensive procurement suite

Here are a few examples of procurement tasks solutions like Kissflow Procurement Cloud can handle:

1.Purchase requisitions

Fluid forms help you capture, approve, and keep track of all purchase requests. Retrieve PRs and related data whenever necessary, in an instant.

2.Purchase orders

Issue POs and generate orders automatically from approved purchase requests. Keep track of every last PO.

3.Vendor management

Onboard, maintain, and manage vendors in an easy-to-use, efficient platform designed to make vendor rating and choice easy.

4.Purchase invoices

Approve your invoices on the go and perform quick, automatic three-way matching.

5.Procurement Analytics

Generate actionable, data-driven insights from all your purchasing-related data. Use these insights to tweak the vendor management process for improved speed and efficiency.

Unlock the power of a digital vendor management process

Vendor management has a much broader scope than merely building a rapport with vendors. If ignored, it has the potential to affect the viability of any business. Businesses with an efficient vendor management process stay clear of purchasing risks, and derive more tangible benefits.

Kissflow Procurement Cloud is a comprehensive procurement software that can help you incorporate and implement supplier relationship management best practices. Corporate buyers can efficiently qualify and onboard vendors, manage orders, and track vendor performance at a glance.

Looking for a powerful vendor management software? Check out the Kissflow Procurement Cloud demo today to see how dramatically it can improve your vendor management process!

Recommended Reading

• The Vendor Management System Buyer’s Guide (Updated Jan 2024)
• A Guide to Modern Vendor Relationship Management
• Top 3 Vendor Management Tools Every Organization Needs to Consider
• 3 Types of Vendor Management Solutions Your Organization Needs
• Create Your Own Vendor Management Process in 5 Simple Steps
• How to Manage Your Vendor Lifecycle like a Pro