Peak Performance Guide to Vendor Management

Different types of organizations have divergent, sometimes quite exacting vendor management requirements. Some companies take a strictly transactional approach to vendors and aim only to get the lowest possible price, while others treat vendors as partners.

Governmental bodies must often follow strict bidding processes to acquire new vendors. For example, vendors who work with the military may need to follow additional requirements and screenings, like taking drug tests or passing a thorough background check. Businesses have more leeway when selecting and managing vendors, but, to achieve optimal performance, their processes should be as fair and transparent as possible.

Some companies partner with vendors for years, but not all vendor relationships last (or need to last) a long time. Frequently, organizations have a one-time need, and therefore contract with a vendor to provide a good or service for a short period of time. For example, a clothing retailer that sells trendy items may not benefit from long-term contracts. However, both long and short-term vendors require efficient, constructive, transparent management.

In strategic vendor management (SVM), organizations take control, define how they work with vendors, and focus on developing relationships. The proactive approach of SVM supports future success and outcomes that are mutually beneficial to both company and vendors.

In addition to looking for quality, pricing controls, and consistency in delivery, strategic vendor managers explore opportunities for innovation, cross-planning, and new partnerships.

According to Jon M. Quigley, author and Principal at Value Transformation LLC, getting the lowest price isn’t a strategic position in vendor management — getting quality and reliability is. 

“We must get past selecting suppliers based on cost alone in order to even have a chance at forming strategic associations with high-value vendors,” stresses Quigley. “One of the most immediate things to consider when it comes to strategic connection [is that] high-value vendors are not commodity-based. We want to cultivate a relationship that has a high degree of transparency, a recognition that the supplier must remain in business for us to likewise remain in business.”

Quigley adds that there are two aspects to consider: “One is how you manage regarding mission fulfillment, and the other is about how to manage the strategic vendors who get most of your business and provide growth and profitability.”

Other aspects of strategic vendor management include the following:

• Spend Visibility: This is one of the activities that vendor management organizations engage in to manage risks, optimize buying power, and identify savings opportunities. In addition to identifying opportunities to save, spend analysis pinpoints noncompliant spending, assists with better supplier management, and highlights inefficient processes.
• Vendor Segmentation and Risk Management: Desko says that strategic vendor management is ultimately about managing risk. “Segment your vendors based on risk. Use a scoring system that allows you to identify and stratify the risk factors that each third party presents, and then let that be your guide for how often and how deeply you assess the risk at those organizations.”
  
  Desko recommends considering the following factors when stratifying the risk: the number of records they hold; the specific data types they hold; how responsible they are for direct customer interactions; whether or not they affect the availability of your services (i.e., the downtime risk); and any special compliance considerations, like the Payment Card Industry Data Security Standard (PCI DSS), the General Data Protection Regulation (GDPR), and the Health Insurance Portability & Accountability Act HIPAA.You can learn more about vendor management in “The Definitive Guide to Vendor Risk Management: Strategy and Tips.”
• Vendor Collaboration: The ultimate benefit of any vendor relationship comes from working closely with vendors and cultivating a close relationship with key vendors. Brainstorming can unlock game-changing innovation that gives you a competitive advantage, brand equity, shareholder equity, or, in the nonprofit world, better outcomes for patients or citizens.
  
  Quigley says it takes over a year and a lot of planning and retooling to get a manufacturer’s new technology out into the market, which accounts for why things can be slow to change, particularly in the automotive industry. There are times when a vendor, independently of the manufacturer, will come up with an innovation that is not customer specific. If you have a good vendor relationship and are interested in outpacing your competitors, you can pay for that innovation to gain a strategic position in the marketplace.
  
  Buyers and vendors can also engage in cost optimization, quality management, relationship building, innovation, and risk management.
• Vendor Performance Management: The process of measuring and analyzing vendor performance helps organizations save money, mitigate risk, and drive more value out of a contract. Quigley says that “effective vendor performance management is all about collecting and using data to verify how well you and your vendors are meeting service-level agreements.” Vendor performance management is a complex and significant component of company success.
  
  Learn more from the experts and download tools in “How to Master Vendor Performance Management.”

The vendor management office (VMO) is a strategic business unit. The VMO evaluates and oversees suppliers of goods and services and oversees regular interaction and long-term relationships with vendors.

“Some of my larger clients have a VMO or are moving in the direction of having a VMO,” says Quigley. “They are looking at long-term relationships over low cost. A strategic organization selects vendors that strengthen its product and offer the company what it requires now and in the future. VMOs look at the economic stability of a vendor. Tier-one vendors make investments in key technology and the competencies that your company will require over the years.”

 “Another issue that VMOs are looking at these days is the vendor footprint. Supply chain problems due to Covid have highlighted the problems related to overseas parts manufacturing,” explains Quigley. “I work with many clients who have vital parts and machinery created in Asia, and because of Covid-related manufacturing and shipping problems, these clients’ schedules and budgets have gone awry.”

Cars and aerospace companies are looking at VMOs, according to Quigley. “There are always cost pressures,” Quigley says. “For example, in the automotive industry, the goal is to reduce costs by six percent annually. That’s hard to do without cutting corners on quality and safety. This is an area in which vendor partnerships can definitely help.”

Gerard Blokdijk is CEO of The Art of Service and author of over 50 business management books, including Effective Vendor Management: A Complete Guide (2020 Edition). Blokdijk offers insights into why VMOs are a growing trend.

“VMOs have grown in importance in parallel with IT outsourcing,” Blokdijk stresses. “Larger organizations are more likely to have a VMO. The VMO often originates with a company’s CIO, who typically oversees in-house IT personnel and external vendors, like overseas IT. Because of that reporting structure, close management and monitoring are essential to managing the quality, price, and other factors, particularly risk.”

The VMO brings together multiple purchasing and vendor management centers and functions for greater efficiency. “VMOs usually work hand in hand with a chief risk officer (CRO) or whatever high-level officer is in charge of risk,” says Blokdijk. “Cybersecurity threats keep coming, as we all know so it makes sense to ensure that risk management matures as risks grow.”

Furthermore, Blokdijk says, “The VMO is responsible for the works — that is, the full range of vendor management — with a strategic eye toward the following: due diligence, risk assessment, quality assurance, hiring, relationship management, subject-matter-expert training, participation facilitation among working groups and management committees, and enterprise-level reporting for senior management.”

To learn more about the vendor management office, check out our comprehensive guide to the vendor management office.

Follow these three steps to lay the foundation for a solid vendor management program:

1. Identify Your Goals and Needs: You need to address several different areas before creating a vendor management program. One such area is the self-assessment, which will help you shape your program's purpose and identify the vendors that receive the final document.
2. Formalize Your Vendor Management Program in Writing: Create a vendor management program document to share with stakeholders, so everyone is on the same page. The completed program contains all the procedures, policies, and standards that govern how you work with vendors. Some companies choose to share the document with vendors, while others keep it for internal purposes only. Add forms, contracts, and links to portals that collect documentation.
3. Put Your Program into Action: Use the program to manage every vendor relationship. Make sure to engage your vendors in the process by communicating with them regularly concerning how they are performing against goals. Each time a vendor delivers a project, use the data you collect to inform any vendor management program improvements.

You can solve most, but not all, vendor management challenges with advance planning. Success depends on identifying the common problems and potential solutions, so you aren’t caught off guard.

Problem vendors aren't all alike. What they have in common is that they take up too much time and are harmful to your business. When problems arise, deal with problem vendors, so issues don't fester.

Who is a problem vendor? They may violate the terms of their contract, provide poor service or substandard products, miss deadlines, or be unpleasant to work with. Still, even the most challenging vendor relationships are salvageable — and are worth mending because finding, vetting, and onboarding vendors is time and cost consuming. If you need some assistance when looking at vendor issues, use a vendor evaluation template .

Here are some suggestions for handling problem vendors:

• Communicate: Don't let the problem sit. Be clear, be sincere, and take every opportunity to speak personally with vendors rather than sending an email or a letter.
• Keep Records: Use facts, data, and metrics as part of your discussion to keep the heat down in your interaction. 
• Get the Vendor Point of View: Ask your vendor for their perspective and what they would like to have from you in order to settle any dispute.
• Set an Incident or Time Limit: While it's essential to be flexible and negotiate, you should know when to move on.
• Bring in a Mediator: For disputes that involve a large amount of money or reputational damage, a neutral third party is in order.
• Sever the Relationship Only as a Last Resort: Your vendor management program should include an exit plan.