Vendor Management and Procurement Strategy
Updated: Oct 25, 2021
The business organization is a dynamic operation with evolving needs that cannot always be met through in-house resources. Vendors play a crucial role in the economic production chain, providing goods, services or business support systems so that organizations can function at optimum efficiency. The interplay between vendors and clients is a critical cog in the machine, yet vendor management relationships may be taken for granted when the procurement system seems to work smoothly.
The Customer-focused Organization
Today’s organizations put customer satisfaction at the front and center of their business strategy. This is a logical tactic, considering that customer acceptance and loyalty drive the business. Business leaders, regardless of their level in the management hierarchy understand that pandering to the target customer ensures some modicum of success when in brand development, sales growth and profitability. Elaborate systems for tracking customer preferences, habits and demographics are constantly being tweaked so that the marketing and sales departments can adjust their strategies accordingly.
The production or support side of the business is not as visible, but procurement officers should pay as much attention to their vendor management practices as marketing officers do with their core customers. Vendors are not just faceless bar-coded entities that fulfill contracts for goods or services based on a corporate timetable. Third party suppliers merit more attention than signatures or stamps on invoices. Many purchasing managers establish a core of vendors they have found reliable over the years, which may represent the full extent of the company’s vendor management policy.
Understanding the Need for Vendor Management Initiatives
Today’s organizations have become quite adept at creating databases. Each organization maintains a basic vendor database with contact information, goods or services provided and pricing. Surprisingly, much of this information is insufficient when it comes to evaluating the financial impact of changing suppliers or optimizing third-party contracts for purchasing efficiency.
Where companies have not committed to a professional vendor management systems, you can expect to see inefficiencies in the procurement system that would trickle down to the bottom line whether management is aware of the issues or not. Personnel changes on both client and supplier sides are factors in information breakdown in the purchasing process. It may not be difficult to identify preferred suppliers, but smaller tertiary vendors whose contributions are just as important may be outside the information loop. Some vendors may be operating on an as-needed basis without a formal contract, yet they show a significant spend, indicating that their contributions may be more important than what a casual observer may see. It is also possible that long-term suppliers, contracted under a different management team, no longer meet current requirements, commitments and standards. That said, client companies may not have taken the time to to establish and review vendor performance indicators, including service level agreements or SLAs. Vendor companies go through changes as well, including changes in leadership, fluctuation of production targets and shifts in business practices that may affect their risk ratings.
Even in business, historical perspective is key to assessing the potential of business relationships. The vendor management strategy should include wide-ranging input on vendor performance, preferences and comparative data.
Building Productive Relationships through Vendor Management
Vendor management should be a key component of business purchasing practices to ensure continuity of business processes. Third-party suppliers should be evaluated periodically, using reliability and predictability metrics that are most relevant to the requirements of client companies.
With an audit system in place, procurement is more likely to operate on a balanced budget, avoiding unexpected spends that may require out-of-contract purchases. Unplanned procurement, even when using the same stable of vendors, may not be covered under existing pricing and purchase commitments. Procurement managers can negotiate from a position of strength with thorough knowledge of the other party.
Efficiencies of scale lead to financial payback for clients and vendors. Long-term relationships with vendors will limit the need to change suppliers, which in turn leads to new agreements and new pricing structures. On the other hand, suppliers that are assured of a continuous business stream are more receptive to financial agreements favorable to client companies.
Regardless of the type of organization, procurement plays an important role in the entity’s business success. Focus on developing credible and reliable vendor relationships, and financial gains will follow.