A complete overview of your vendors that helps create clarity and deliver increased value and strengthen your relationships with the vendors? That is vendor management. But what exactly is vendor management about, and why is it important?
These are the questions we seek to answer in this guide, so you can become proficient on the subject and get your questions about vendor management answered. We also present a solution, so you can get an overview of your vendors through effective vendor management.
What is vendor management?
In short, vendor management is about the processes that help strengthen and maximize the value of the relationship with your vendors. Vendor management is also about creating an overview of the different vendors. In addition, vendor management includes activities and tasks such as:
- Contract management
- Reporting and tracking of KPIs
- Setting common business goals that benefit both parties
- Compliance
- Risk reduction
- Overview of key personnel
- Resolution of disputes
Thus, vendor management creates a central place where information about vendors, agreements, and key contacts is collected. But effective vendor management is not just about gathering this information, having vendors, and interacting with them. It also involves enabling strategic work that ultimately ensures maximization of the value you get from your vendors, ROI, achieving business goals, and also minimizing risks and ensuring compliance.
But why is vendor management increasingly important?
Most companies operate in a reality with increasing regulation and heightened requirements that businesses must comply with. This creates complexity when it comes to handling and collaborating with suppliers and vendors. With new regulations and accounting standards such as IFRS 16, there are requirements for companies to ensure that their suppliers and vendors comply with various standards.
This creates new challenges for companies. They need to comply with new rules, reduce risks, and ensure operational efficiency. And then they must ensure that their business partners meet their contractual obligations. There are many tasks to manage, especially if you do not use a smart tool that utilizes technology's possibilities to create an overview of suppliers and vendors. Here, digital vendor management enters the picture, creating the necessary overview that today's business landscape with increasing demands on companies requires.
The typical challenges when it comes to vendor management
There are a number of classic challenges when it comes to handling and having an overview of vendors. Maybe you can recognize your own situation in one or more of the following challenges.
Lack of digitalization
Old-fashioned, paper-based processes. Contracts that are printed out, signed, and stored in a drawer, and when you need it, it's gone. Or forgotten. Manual and old-fashioned processes create a series of challenges when it comes to vendor management. You miss deadlines, you unintentionally renew contracts that should not have been renewed, you miss the chance to renegotiate, and you forget to check if the vendor lives up to the agreement written in the contract. Manual processes also increase the risk of inaccuracies in data and audit errors and make it difficult to comply with various requirements. This is all a result of the lack of optimized, digital processes that effective vendor management provides.
Lack of centralization and control
If multiple key people keep track of contracts and agreements, you may experience the scenario that contracts are stored in different email inboxes or drawers, and suddenly the overview disappears. Here you miss the opportunity to track the contracts and their obligations, but also to remember important deadlines, to renegotiate and observe compliance. Therefore, effective vendor management requires a central place where key people have access, and where all agreements are stored together with important data.
An obvious example of the importance of a common overview of agreements is this case where Visma describes that a new contract management system resulted in savings of NOK 220 million.
Lack of compliance and risk reduction
If agreements are stored in different inboxes and drawers, the overview disappears. This can result in a lack of compliance and increased risk. Through effective vendor management processes, procurement teams can assess the risks of their suppliers and vendors, evaluate quality, and ensure efficient supply chains. In this way, it also becomes much easier to ensure the company's reputation, customer satisfaction, and regulatory control.
Lack of scalability and exploitation of opportunities
If the scenario is that agreements and contracts are stored in different mail inboxes and drawers, and the agreements are also registered in a homemade Excel sheet, it becomes difficult to adapt to changing regulatory demands and dynamics in the market. This hinders the opportunity for innovation, competitiveness, and scalability. With an efficient system designed for vendor management, scalability is enabled through tools that utilize data and make it easy to adapt to new demands and regulations.
What is best practice when it comes to effective vendor management?
You have read about what vendor management is, why it is important, and the typical challenges vendor management usually presents. But what does best practice look like if you want to improve and optimize your vendor management?
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Research, assessment, and selection
The foundation for a good partnership is that vendors and suppliers are selected based on a series of criteria such as regulations that must be complied with. Do the suppliers live up to these? This should be assessed before an agreement is made. This stage is important as the correct research and assessment create the foundation for a valuable partnership, compliance, and risk reduction.
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Contract negotiation
Once the partner has been assessed and selected, contract negotiation comes into play. This part helps to formalize the supplier/vendor/customer relationship and set clear expectations, which are written into the contract. Here the procurement team negotiates good terms and will also write legal and regulatory requirements into the contract. This process also enables effective onboarding, so the partner understands their obligations, roles, and responsibilities. In this way, effective vendor management ensures that requirements are met, and expectations are met. In the end, this creates successful partnerships and minimizes misunderstandings and disputes.
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Monitoring and risk management
The next step is that the agreement has been made. Now it is stored in the central register, and here key people can monitor whether the contract partner lives up to the contract and also proactively check up on where there can be improvement and innovation. Likewise, key people can identify and assess risks and ensure compliance. This monitoring helps ensure that the company maintains its reputation, operability, and financial security.
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Renewal or termination?
A major advantage of effective systems for vendor management is that they incorporate notifications and reminders and remind you when a contract is up for renewal. This gives you the opportunity to review the contract and proactively assess whether it should be renewed, renegotiated, or terminated. In this way, you avoid continuing cooperation with underperforming partners and exploit the opportunity to secure new benefits and terms in a renegotiation. Moreover, an effective system can help you offboard suppliers and vendors properly by protecting sensitive data and ensuring a smooth transition.
What are the benefits of effective vendor management?
The list of benefits is long, and you may already have become more knowledgeable by reading this far. By modernizing your processes related to vendor management, you can reap many benefits, including:
- Save time by going from manual to digital work processes
- Create a single source of truth by centralizing all agreements and data in one place
- Increase your efficiency and productivity
- Maintain a good reputation
- Ensure good partnerships
- Utilize opportunities for renegotiation and securing terms and requirements
- Minimize risks and enable compliance
- Easy continuous monitoring and observation of performance
Get an overview of your suppliers today
At House of Control, we mean it seriously when we say that we help companies gain control over their suppliers, agreements, and contracts. Our tools free up time for reporting and increase security, ensuring you have full visibility over suppliers and agreements. Contact us today to learn more about how you can gain full control over your company's agreements, commitments, and ongoing revenues – including our module for quick and accurate handling according to the requirements of IFRS 16.
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