Creating an Effective Vendor Management Process
By Kemal Carr, President, Madison Advisors
Of course, making money is the number one focus for businesses, yet how the money is spent is just as important. Keeping costs and spend under control improves operating efficiency and adds to the bottom line, as well as helping to ensure the quality and consistency of the product or services you offer your customers.
Depending on the size and scope of your enterprise, certain expenses can be difficult to get your arms around for a number of reasons. You may not have a central record to store all the data, hence, you are unable to capture the details of all the interactions in play, including purchases made by different lines of business. Vendor management is one such area. With certain vendors, you may not have a defined contract lifecycle, so the choice of vendors and the cost for some items becomes more or less an open discussion. If no benchmarks or standards are set in place, there is no defined way of managing the relationship with the supplier or of ensuring the vendor has all the capabilities to provide exactly what you need. This is where an established vendor management process becomes valuable in terms of cost—and time.
In establishing a vendor management program, we’ve found these five categories to be helpful:
- Spend visibility–Survey all departments and lines of business in your organization, including digging into accounting records—especially A/P—to get some idea of who is spending what, for what and with whom.
- Vendor segmentation–Classify your vendors to enable a segmented approach—don’t fall for the sales pitch that one vendor can do it all.
- Collaboration–Establish standards for continuous improvement and enhanced vendor communication. Having the ability to create vendor portals is key here.
- Vendor performance management–Set up appropriate KPIs to measure your vendors against your requirements and against each other.
- Risk management–Develop a risk strategy and a mitigation plan in the event of the unforeseen.
Gathering all the information about current interactions can be the most time consuming aspect of this process, but it’s an essential first step toward implementing all the rest. Different buyers in your company may be purchasing the same or similar products from different vendors for different prices. In many cases, you’re doing business with a particular vendor because you’ve always bought from that vendor, even though you may find lower prices and/or better service from another company. And is there—or should there be—any one person or department who can track all this? Often this responsibility is given to procurement.
When you’ve determined what you’re buying and can sort your vendors into segments, you’ll be able to compare their prices, quality and service levels to decide who to keep and who might be eliminated, or if it might be time to look for someone new. Talk to your “keepers” and new vendors to make your expectations of them clear, as well as to understand their concerns and requirements. Based on two-way communication, you may want to develop a contract with them that includes milestones and KPIs that are agreeable to both of you. Often, you’ll find a simple transparent discussion with your keeper vendors about price or service concessions will inspire them to uncover special discount programs available to your firm, thereby saving you money without switching risks.
Risk management and mitigation is another area that is often neglected. What if a vendor goes out of business, is acquired by another company or suffers some other disaster that makes it impossible to deliver on their promises? Do you have a replacement available or can another vendor in a similar field take on additional orders? A continuity plan should be determined in advance of a vendor’s emergency situation to avoid disruptions in your own operations. We also advocate what I like to call a “challenger” program model for each vendor type. Have a secondary supplier doing small jobs as a safety measure for continued best-in-class service and price, in addition to continuity, should your primary supplier fail.
Most large manufacturers, whose business depends on a constant and reliable in-flow of materials, typically have vendor management procedures in place because it’s critical to their survival, but it’s really a best practice for enterprises in any field. Effective vendor management can save you time and money and ensure you can live up to your own customers’ expectations.