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Vendor Management Best Practices

Establishing positive vendor relationships is crucial to running a successful business. Nonetheless, vendor management has several moving parts, and you have a lot of things to keep track of. This includes who your third parties are, the services they offer, which internal policies apply to them, and what sensitive data they have access to. Without a strong foundation of vendor management best practices, vendor risks could manifest into failures that could affect business continuity.

This post outlines the best practices for implementing vendor relationship management and will enlighten you on all the factors you need to consider when managing vendors.

But first things first, let's define what vendor management is.

What Is Vendor Management?

Vendor management refers to the process through which organizations control costs, steer service excellence, and minimize risks to obtain optimum benefits from their vendors throughout the lifecycle of their contractual relationship. The vendor management process entails several different stages, including:

  • Vendor sourcing: This process begins with researching the right vendors who fit the description of the specific products or services that your business needs. You can research by looking at their LinkedIn profiles and other social media handles.
  • Contract negotiations: Once you have identified potential options, typically, you'll ask them to furnish you with quotes in the form of RFPs (request for pricing) and RFQs (request for quotation). Beyond their pricing, you should compare and evaluate vendors using factors like security practices, reputation, capacity, and effective communication.
  • Onboarding: After vendor selection, comes the onboarding process. It involves the collection of the requisite information to approve a company as a supplier, therefore enabling your business to purchase goods and services from that company.
  • Monitoring vendor performance: You'll need to establish metrics for assessing vendor performance to ascertain that they meet the standards of your organization. Depending on a vendor's scorecard, you can either retain them or seek the services of a different vendor.
  • Risk management: Vendor risk management involves evaluating potential risks that could hurt your business. This includes anything from data security, compliance issues, intellectual property violations, lawsuits, and more.
  • Payments: Upon receipt of goods and/or services, you need to make timely payments to foster good supplier relationships.

Undertaking these tasks manually can be challenging. This is where vendor management system/software (VMS) comes in handy. A vendor management software is an online web-based solution that functions as a single node that manages all vendor-related activities in an organization in real-time, ensuring profitability and overall long-term growth in a cost-effective manner.

Best Practices for Effective Vendor Management

Sound vendor management practices can help you get maximum benefits from vendor relationships. These best practices enable you to choose and monitor vendors, continuously improve performance, lower risk over the lifecycle of the contract, and deliver higher quality products or services. Here is an outline of some best practices for vendor management:

Establish a Clear Vendor Management Policy

A vendor management policy is a document that informs the company board and senior management about vendor management activities. An effective vendor management policy should include elements that drive performance improvement, quality improvement, risk reduction, innovation, collaboration, and vendor diversity. Here is an outline of best practices to heed when creating a vendor management policy:

  • Form a purchasing committee that includes a unit manager, a vendor manager and manager, and other stakeholders.
  • The policy should include an outline of how the department operates and board and management oversight standards.
  • Align your company's purchasing strategy with the overall strategy.
  • Attain the ideal number of vendors: To arrive at the appropriate number, you should consider the diversity of your requirements, risk factors, and market dynamism.
  • Create a vendor selection and reviewing process: The set parameters for this process should make sense to your company.
  • Establish guiding principles for vendor risk assessment: Ensure that you review the legal, financial, and information security risks of every vendor.
  • Determine the metrics you want to monitor: Use key performance indicators (KPIs) to define what you want to monitor. This should include qualitative observations and data that you capture and measure objectively.

Develop a Sound Contract Management Strategy

Vendor contracts establish more than just terms and conditions. The contract management process refers to managing the creation of contracts, their negotiation, execution, and analysis to optimize an organization's financial and operational performance. The objective of the contract management process is to ensure that all parties to the contract meet the expectations and obligations outlined in the contract. Here are the steps involved in the contract management process:

  • Enabling contract management: This step involves the identification of the contract and the verification of roles, responsibilities, and procedures.
  • Contract negotiation: Upon completion of the draft, the parties to the contract should assess whether its terms are acceptable.
  • Contract approval: To ensure that this step moves smoothly, users should create tailored approval workflows, including serial and parallel approvals, to ensure that the decision-making process is swift.
  • Contract execution: Executing the contract enables users to control and shorten the signature process by using fax support or eSignature.
  • Obligation management: This stage of the process requires a great deal of project management to ensure that stakeholders are meeting deliverables and that the value of the contract doesn't deteriorate.
  • Revisions and amendments: Systems should be put in place to amend the original contract.
  • Auditing and reporting: Contract audits are vital to an organization's compliance to the terms of the agreement and any possible issues that may arise in the future.
  • Renewal: You should automate the contract renewal process.

Ensure that Vendor Contracts Delineate Roles

A vendor contract is a legal agreement that outlines your expectations of a vendor. It specifies the nature of the product or service, the quantity the vendor supplies, and the terms under which the vendor supplies these products or services. Among the vendor contract best practices to heed include:

  • Be sure to follow vendor management policy guidelines when developing contracts.  
  • Create service-level agreements (SLAs) or scope of work (SOW): These documents should cover your general parameters and vendor-specific agreements to prevent issues down the line. They should also include performance expectations, compliance requirements, data breach management details, and their corresponding penalties.
  • Information-sharing expectations: You should ensure that you share information such as your vendor strategies, objectives, plans, challenges, organizational details, and technology stack as part of your agreement.
  • Terms of payment: The vendor contract should describe the cost of products or services, payees, payment schedules, and late payment penalties.
  • Fourth-party stipulations: In case your vendor subcontracts work to a fourth-party, ensure that your third-party vendor monitors to ascertain that these fourth-parties comply with the contractual agreement.

Use KPIs to Measure and Monitor Vendor Performance

A vendor management metric or KPI is a measurable value that tracks vital areas of vendor performance and capacity. KPIs support continuous improvement pertaining to how a purchase team manages its supply chain, uses its vendors, and makes adjustments. You may have to shift plans as necessary based on KPI data to attain your company's goals. Here are some vendor management KPI best practices:

  • KPI limits: They should measure what's important to your business and emphasize your core values.
  • Metrics explanation: Your vendors should be able to understand your KPIs and work to meet them. By sharing these metrics, you clarify expectations and offer vendors a proper yardstick to use to determine whether they are meeting expectations or underperforming.
  • Realistic expectations: Ensure that you set attainable and realistic deadlines when considering quantity, quality, and schedules.
  • Continuous review: Based on revised business goals or reasonable market conditions, KPIs aren't static. Review them occasionally, adjust as necessary, and consult with your vendors as you consider making adjustments.
  • Data tracking with software: Track KPIs using software to attain the best results. This technology should gather data and indicate corresponding accountability.

Manage Outsourcing Risks and Outsourced Service Providers

Your business faces inherent legal, financial, and data security risks when outsourcing products and/or services. You can protect your interests and mitigate these risks by establishing clear policies, performing due diligence before signing contracts, and performing ongoing oversight. Here are some vendor risk governance best practices to help you streamline your vendor management process:

  • Risk tiering: Risk tiering involves the ranking of risks based on how likely it is that they will occur. Risk tiering enables you to rank the risks associated with a given product or service to determine where you may need more due diligence.
  • Vendor tiering: This involves the classification of vendors based on the level of security risk they are likely to introduce to your organization. Separating vendors based on the level of their security risk creates a more efficient risk assessment workflow that considers the risk thresholds of all vendors.
  • Appropriate control levels: Keep controls realistic as well as easy so that the vendors can understand and follow them.
  • Legal risk management: You should have an in-house legal team that handles legal governance, compliance, and risk management issues.
  • Financial risk management: The insolvency of a critical vendor poses a significant risk to your business. You can manage such risks by examining a vendor's audited financial statements, credit rating, tax records, and bank statements.
  • Data security management: Developing a sound cybersecurity strategy can help you manage the risk of your data being breached.
  • Creating a vendor risk management checklist will ensure that you incorporate best practices when managing or mitigating various risks.

Foster Vendor Collaboration

Fostering and maintaining close ties with your vendors is the cornerstone of a sound vendor management strategy. Effective procurement helps save money and accelerates innovation through research and development and innovation. Vendor collaboration moves the needle for entities that do it well.  Here are some best practices to help you foster vendor collaboration:

  • Develop formal onboarding: Ensure that you set clear expectations during the process of onboarding.
  • Create an alliance in which you and your key vendors benefit: Identify vendors that make the best partners and develop a relationship that addresses critical corporate agendas like sustainability, innovation, and efficiency improvements.
  • Build trust and flexibility: Take time to understand your vendor's business and then develop mutually beneficial solutions.
  • Challenge your vendors to innovate and excel: When you shift to strategic vendor management, your goals should go beyond mere cost savings. Challenge your vendor to be innovative and to improve sustainability, efficiency, and quality.

How to Establish a Vendor Exit Strategy

A vendor exit strategy is an integral part of the vendor lifecycle. As such, you need to pay close attention to your contract language. You can avoid a business crisis by having a sound exit strategy. Here are some best practices on how to end a vendor relationship (graciously):

  • Include an exit plan in your collaborative contract.
  • Undertake a 90-day review and semiannual updates: Your agreement should include an initial three months of review. Moreover, include a provision that allows you to update the contract every six months.
  • Ensure you have valid grounds for contract termination: Terminating a strategic vendor agreement is a crucial undertaking with serious operational and financial risks. As such, you need to have valid grounds for terminating the contract to avoid incurring legal penalties.
  • Keep accurate records throughout the period of the contract. These should include meeting notes and manuals. As a rule of thumb, you should store documents and any communication electronically 10 years beyond the contract's duration.
  • Furnish your termination team with a checklist. Some of the stipulations that should be in the checklist include: The vendor must return all data, documentation, inventory records, intellectual property rights, and confidentiality and nondisclosure agreements. The vendor must also relinquish all data-sharing platforms and commit to cooperating with new vendors to achieve a seamless transition.

Develop a Sound Vendor Management Strategy

At UpGuard, we believe that a formal vendor management program is a must-have in today's business environment. It will not only help ensure that your business runs smoothly, but also help optimize its bottom line both in the long and short-term. If you need help developing a new supplier management program or taking an existing one to the next level, sign up for a free trial.

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