vendor management

Importance of Vendor Management in Supply Chain

September 23, 2021 Blog

Managing vendors may be a difficult process for any company with a large vendor base or an intricate supply chain. Vendor management, on the other hand, is something that all businesses, regardless of size, should strive to build and maintain.

Vendor management refers to a company’s ability to handle all interactions with third-party providers. Vendors, when properly managed, may assist you in meeting customer demand and streamlining your supply chain execution for increased output and profit.

Vendor management requires two critical actions to be completed successfully. First and foremost, suitable vendors must be chosen. Then, for both parties to continue to receive the most value out of the connection, a solid relationship with those vendors must be maintained.

What is Vendor Management in Supply Chain?

Small businesses may only work with a few vendors, whereas major corporations may have hundreds or even thousands of vendors in their supply chain. When many suppliers are involved, vendor management can become exceedingly complicated, as each will have its own pay rates, contract terms, and communication methods.

This complexity is manageable with the help of online web-based tools called Vendor Management Systems (VMS). 

Vendor management is a process used in supply chain management to:

  • Control costs
  • Mitigate risks
  • Ensuring service deliverability
  • Increase value of vendor relationships

What Is Involved in Vendor Management?

Vendor management encapsulates several different tasks, including: 

  1. Business goal identification
  2. Project definition and Request for Proposal (RFP) creation
  3. Vendor identification and shortlisting
  4. Vendor evaluation, risk assessment, and selection
  5. Negotiation and contract management
  6. Relationship management
  7. Performance evaluation
  8. On-time payment
  9. Continuous improvement

Benefits & Importance of Vendor Management

  • Increased Efficiency

According to PWC, the biggest benefit of vendor management is the improved efficiency that it brings.

As your relationships with vendors grow, so will your communication channels. Vendors will gain a better understanding of your company over time, including the people who work there, how it operates, and the business goals and objectives. This will allow them to increase their service efficiency through competitive pricing, higher-quality goods/services, and dependability.

  • Improved Compliance

As indicated already, vendor management starts as early as selecting and onboarding vendors. In order to ensure the vendors that you are working with are compliant, it is important to assess their capabilities before selecting them. From there, management of vendor contracts and regular monitoring will ensure that they maintain the high standards expected of them.

With compliance maintained amongst your vendors, your organization will be protected against any threats to the quality and prices of products/services that you purchase and the lead times involved in receiving them.

  • Reduced Costs

Through, effective vendor management organizations can significantly reduce the amount of money they spend with their vendors.

Many of the benefits of vendor management are interlinked. For instance, compliance plays a key role in reducing costs. When assessing vendor capabilities, particular attention should be paid to their pricing. Also, it is important at this stage not to limit your supply base. Assess and onboard an adequate number of vendors that can facilitate your organization’s goals and objectives, who will compete for your orders and thus bring prices down.

Again, technology can also greatly enhance your VMS. With regards to cost reductions, spend analysis reporting, found within many e-procurement solutions, allows organizations to track their expenditure in real-time and assess where they are overspending, which vendors they are overspending with, and the vendors guilty of inefficient turnaround times. As a result, organizations can save millions of dollars each year.

  • Improved Reliability and Quality

As you improve your VMS with better efficiency, streamlined relationships, and superior products, you will also see reduced risk in your business model. Strong relations with vendors will yield better response times and overall improved reliability and quality of service provided.

During the assessment stage of potential vendors, organizations can eliminate any low-performance vendors. Existing, low-performance vendors can also be eliminated when reviewing contracts. Taking such actions against potentially non-compliant vendors helps to mitigate the risk of a poor service being delivered.

Having the assurance of high-quality products/services being delivered by your vendors also has its benefits in costs savings. You will find that your organization saves money from not having to replace faulty products or inadequate services when vendors deliver to the required standard.

– Prabhu Muthusamy

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