How to Create an Effective Vendor Management Process

A key stakeholder in any successful business is the vendors they work with, which takes a lot of care and consideration to make sure that the company is maximizing the value they are getting out of the relationship with the vendor.

In this article, we will explore what the vendor management process is, strategies on how you can improve your vendor management, and the tools you need to implement it in your business.

What is Vendor Management?

Vendor management is a company’s internal structure for dealing with external vendors and suppliers- the suppliers may be of essential services like healthcare or nonessentials like office supplies. The business’s partnership with vendors is one of key importance and establishing an effective system for dealing with them will lead to a boost in revenue. Vendor management is also a form of risk management- the activities of a key vendor is capable of either a financial downturn or a boost in profits. Regular auditing and check up of vendors can prevent entering into financially unsound vendor relationships.

Benefits of Vendor Management

The benefits of building effective and lasting vendor relationships are uncountable. Vendors or suppliers of your business’s goods and services are some of your important business partners and as such, a concerted effort must be made towards creating an effective vendor management system, capable of maximizing the business and vendors relationship that exists.

Vendor management is vital for the economic well-being of the company. An effective vendor management structure must be established in the company in order to streamline activities.

How to Create an Effective Vendor Management Process

Vendor management process in a company must conform with the following vital steps in order to be as effective and thorough as possible.

Create A Dedicated Vendor Management Team

Assign the task of vendor management to a select few within the organization. They are tasked with employing the right vendors and contractors, in line with the organization’s financial and corporate objectives. This specialized team also manages every transaction or enquires that arise from vendors and suppliers. The specialized team has a duty to carry out due diligence on any prospective hire. Vendor contract management and vendor performance reviews also fall within the purview of the team. The size of your vendor management team depends on your business’s outsourcing strength, the number of vendors you have influences the constitution of the team.

The vendor management team is in charge of managing the vendor relationship and ensuring the partnership is as financially rewarding as possible. The team also serves as a liaison between vendors and other essential business departments like the human resources unit. The needs and demands of the vendors are channeled through this team of experienced personnel. The team must have a clear paper and audit trail- decisions must be reflected in official memos and documents. Expenditure must also be meticulously recorded to allow for a proper auditing and ledger keeping.

Organize Suppliers and Vendors

Create a database of existing suppliers and vendors, classifying them, based on the nature of their services. This will lead to both time and cost efficiency, vendor performance can be compared between vendors offering the same or similar services. Effective vendor management entails a detailed grouping of vendors, based on criticality, essentiality, and nature of service. Services like healthcare, technology, and auditing are classified under long-term and essential vendors.

A comprehensive database of vendors and service providers also makes budgeting funds more efficient. You are able to appropriate more funds depending on your company’s needs at a specific period of time. Classifying vendors by nature of service also gives a sense of their overall importance to the company’s long-term goals. Vendors of essential commodities are ideally retained as a long-term business partnership, suppliers of goods and services that are not specialized or essential are necessary for short-term gains due to their expendability.


The nature of a business- vendor relationship means you have to share information with your vendors of certain business decisions, often of a confidential nature. Emails and other methods of correspondence may contain vital information. Establish the nature of the relationship, confidentiality agreements should be entered into over confidential and proprietary information. The terms of a vendor relationship should clearly state the consequences of a breach of confidentiality, this will ensure vendors take responsibility and protect company secrets. Establish a secure e-mail address for both parties to use, for official business correspondence, this address must be dedicated to only official business.

Risk Management

Constants vendor assessments must be carried out due to the nature of their relationship with the organization. Depending on the nature of business a company engages in, vendor risk assessment based on the following factors are mandated by Federal regulators:

  • Strategic
  • Compliance
  • Reputational
  • Security

Checks should also be in place to ensure proprietary information and confidential data vendor are exposed to are not leaked or divulged to competitors. The criticality of the vendors must be established.

Criticality simply means the vendor’s level of access to confidential and proprietary information. Vendors with high criticality must be accessed for potential failings and risk factors on a yearly basis. Regular scrutinization of the internal workings of vendors, especially those with high-level access to company information, is mandatory. Audits and assessments must be carried out to determine their suitability for a partnership in the long-term.

Implementing Vendor Management Strategies

The end result of any business relationship should be mutually beneficial, this is doubly so for vendor relationships. The goal should be an actualization of both parties goals and objectives, the company gets value while the vendor gets compensation for services rendered. An effective vendor relationship will give a company the competitive edge required in its industry.

 Creating an effective vendor management strategy should take the following factors into consideration:

Effective Communication

Ambiguity has no merits, there should be a clear line of communication between the company and vendors. The terms of the partnership must be expressly defined, the contract terms must be in specifics, with no room for ambiguity of intentions. The establishment of a dedicated vendor management team, with officers that understand the nature of such business enterprises taking charge and being responsible for correspondence between the company and its vendors.

Place a Premium on Value

Getting the lowest price should never be the goal of a vendor management system. It is instructive to note that employing cheap labor may seem like a sound business strategy, but in the long-run, such an endeavor results in catastrophic business performance. Hire vendors that give you the highest value for your investments, the choice of vendors can determine the trajectory of your business. Hire vendors and consultants with expert knowledge, capable of providing valuable insight on your prospective joint ventures. Hiring a technology vendor must not hinge on low costs, the importance of technology in the workplace and business world cannot be traded for marginal cost savings in the short-term.

Build a Long-Term Relationship

The value of establishing a strong vendor relationship is immeasurable. Building a relationship based on trust and understanding will help you achieve your business goals. Developing a long-term partnership also eases the business process. For example, a company should establish a strong relationship with its healthcare vendor because it can be a logistical nightmare constantly transferring employees medical records and plans from vendor to vendor. Building a lasting vendor relationship should be the goal of an effective vendor management system.