Why Proactive Vendor Management Is Important in Procurement?
Vendor management is a critical part of the procurement process. As businesses grow and enter new markets and emerging sectors, the sustained supply of materials and services from third party suppliers will get more complex. Undoubtedly, businesses need a long-term relationship with the vendors and need to move towards a collaborative approach as the number of vendors increases.
Moreover, with the high number of contacts, a multitude of contracts, products, and tasks, the existing vendor management practices may appear insufficient, outlining the need for smart vendor management tools.
In this article, we will discuss proactive vendor management, its benefits, and much more!
What is Proactive Vendor Management?
Not long ago, procurement was considered merely a transactional activity. However, it has now become a part of the overall business strategy. In fact, vendors are at the core of your business growth and objectives. However, many businesses still are not able to effectively manage these relationships.
Moreover, relying on multiple vendors, or sticking to just a few current vendors because of convenience when they are not even meeting the criteria can make the situation more complex.
Proactive vendor management, thus, helps organizations transform the vendor relationship from just a passive transaction to a proactive partnership or collaboration. It empowers you to take the right, timely decisions so you can minimize cost, manage potential supplier risks, as well as ensure high-quality deliverables, adding more value in the long term.
In summary, proactive vendor management includes the following.
- Finding or researching the suitable suppliers
- Sourcing the required information and pricing
- Evaluating based on earlier deliverables, work history, and reputation
- Managing vendor relationships which are mutually beneficial
- Assessing performance based on predefined standards
- Ensuring timely payments
What Are the Challenges in Vendor Management?
Ineffective vendor management can lead to various potential risks discussed below.
- Compliance issues: It is important to define quality checks for your deliverables. Not all vendors are suitable and will be able to meet or comply with your business standards. That is why it is important to set the benchmark when entering into a contract with them to ensure you save both time and money.
- Reputation damage: You need to continuously monitor the quality and performance of vendors. This becomes especially important when you are entering a contract. This evaluation will help you with some important insights to weed out vendors who do not perform to your standards and risk your time to market and reputation.
- Lack of transparency: In an organisation managing multiple vendors, it is important to have information at a centralised location and not in silos. Ineffective data storage may make retrieving information difficult. This will enable better management of vendor data as well as improved efficiency and transparency.
- Payment issues: Different vendors have different payment terms and processes. Therefore, to ensure timely payments for good relationships, you need to manage multiple payment methods for different vendors effectively.
What Does Vendor Management Process Look Like?
Here are some basic steps involved in the vendor management process. With that being said, the steps may vary based on the needs and businesses.
- Defining business goals
The first critical step is to define your business needs and goals that require the services of vendors or third-party suppliers. It will help you save time and effort in selecting the right vendor from your supplier base. Based on your goals, you will also be able to identify quality or performance metrics for not only evaluating the deliverables but also the vendors for future requirements.
- Establish a team for vendor management
You need a centralised vendor management team who should be able to dedicate their time and efforts to manage vendors, define performance indicators and selection criteria, evaluate their performance based on business goals, identify new vendors, negotiate contracts, manage transactions, and so on. This team may also help you to avoid the involvement of too many stakeholders.
- Create a centralised database for vendor information
The centralised vendor information will help you to better match the requirements with the right vendors, reduce paperwork and human error, and enable cross-over of information and comparison of vendors. It will, thus, help streamline information for easy change and access.
- Define selection criteria for vendors
Once the above steps are done, you are now ready to define the selection criteria for vendors. You can rely on factors such as reputation, prices, capabilities, industrial recognition, work history, economies of scale, financial stability, deliverability, and regulatory compliances. You can also consider bidding methods including RFQs or RFPs to shortlist your vendors.
- Evaluate and select vendors
If you have gone through the bidding process, then you can compare the proposals submitted by the vendors to evaluate the cost, terms and conditions, deliverables, scope of work, and so on. At this stage, you can use your negotiating skills to get the best value from the vendor in form of discounts or special deals. You can also analyse their strengths and weaknesses to simplify the selection criteria.
- Finalise contracts and vendors
At this stage, you can complete the formalities of finalising the contract and its terms and conditions to start with the vendor onboarding process.
Benefits of Proactive Vendor Management
Proactive vendor management is important for the success of a business’ procurement process. Here are some key benefits of adopting proactive vendor management.
- Reduce risks: Vendor management can help you mitigate supplier risk with respect to the regualotry compliance, unforeseen expenses, etc. Since vendor management helps you to identify the right vendors, you can manage such risks with the right supplier information.
- Cut costs: With greater visibility, you can identify hidden or unforeseen costs to better control your finances. Moreover, the vendor management system enables you to forge strong relationships, thus giving you the opportunity to negotiate better deals and discounts.
- Reduce errors and inefficiencies: With effective vendor management, you can reduce human errors and inefficiencies in administrative processes. Moreover, with a vendor database, you can access information to expedite procurement processes.
- Monitor and optimise vendor performance: With proactive vendor management, you have a system in place to assess supplier’s performance and identify the gaps. You can use this information to communicate your concerns and feedback to help them improve their performance or deliverability.
- Manage brand image: Building a brand takes time and you wouldn’t want to lose that due to a vendor’s unethical activities or compliance issues. A proactive vendor management program will help you weed out suppliers who do not fulfil your standards or checks.
- Forge strong vendor relationships: It is important to have a mutually beneficial relationship with vendors. Such loyal relationships can help you rely on them in uncertain times to ensure there is minimal risk or disruption in your supply chain.
- Improve onboarding: With centralised vendor information, you can aim for fast track and error-free approvals. The faster onboarding translates to a reduction in unnecessary delays, and a quicker procurement process.
Proactive vendor management helps transform transactional activities into a collaborative approach. It helps businesses by improving efficiency, reducing cost and risk, managing brand image, forging loyal vendor relationships and much more.
Induzbuy’s procurement management solution helps you streamline and automate vendor management, contract management, reconciliations, and much more. To know how we can transform your business, contact us today!