47% of all vendor collaboration initiatives hit the wall. Why?
Because the organization suffers from a severe case of an underpowered vendor management program.
Not all vendors have the same relationship with the organization. Hence, all vendor relationships shouldn’t be handled with the same strategy. Placing too much emphasis on driving down costs will only cause a well-devised vendor management process to fail miserably.
Everything from the situation of the firm and vendor to the quantity and frequency of the products and services acquired must be taken into account before devising a vendor management strategy.
Here’s all you need to know about how to create a definitive vendor management process. The blog talks about the effectiveness of the vendor selection process and how the success of your procurement cycle depends on the success of your vendor selection decision. It also mentions creating the maximum value out of your relationship with vendors it is important to understand the true meaning of vendor contract management.
Importance of Vendor Management
Vendor management is the process that empowers an organization to take appropriate measures for controlling cost, reducing potential risks related to vendors, ensuring excellent service deliverability, and deriving value from vendors in the long run. This includes researching about the best suitable vendors, sourcing and obtaining pricing information, gauging the quality of work, managing relationships in case of multiple vendors, evaluating performance by setting organizational standards, and ensuring that the payments are always made on time.
How does Successful Vendor Management drive value?
Before delving into steps to a successful vendor selection process, check out some of the benefits of vendor management in the first place:
- Improved Efficiency: When vendors and businesses are strongly managed through strong communication, vendors learn to better understand their needs, even anticipate them.
- Business Practice Accommodation: Better understanding can also help vendors and businesses to identify places where the supply chain can be streamlined.
- Operational Improvement: Businesses with mutually positive relationships often exchange information and ideas that can lead to improvements in the operational process.
- Cost Savings: Not only does maintaining an ongoing vendor relationship be less costly than sourcing new vendors, but most vendors will also work to provide you with the best possible prices if they have a good relationship with your company.
5 Steps for Building a Successful Vendor Selection Process
The first step towards selecting a vendor is to analyze your business requirements. After the task of searching and selecting prospective vendors, you must develop a contract negotiation strategy to avoid contract negotiation mistakes. Here are five steps to help you choose the right vendor for your organization.
1. Analyze your Business Requirements
It is important to first analyze your business needs before you even begin to search for a vendor. Assemble a vendor selection and evaluation team who would be given the responsibility of finding suitable vendors.
Once the company has finalized what should be outsourced, start to define the business and technical requirements that the outsourced service /product would require. Finally, ask your management team to analyze all the requirements and create a final document stating your business and vendor requirements.
2. Search for Vendors
With clearly defined business and vendor requirements, your vendor selection team would be able to easily find suitable vendors, who can deliver the service /product that you wish to outsource. Ask your team to compile a list of possible vendors, but remember that not all vendors would meet your requirements.
After conducting interviews and researching suitable vendors’ backgrounds, you will have to select a few vendors from whom you would like more information. Your vendor selection team can then write a Request for Information (RFI) and send it to the selected vendors. The next step would be to evaluate the responses from the vendors and create a shortlist of vendors.
3. Write a Request for Proposal (RFP) & Request for Quotation (RFQ)
Now that you have analyzed your business requirements and shortlisted a few vendors that you wish to evaluate, you have to write a Request for Quotation (RFQ) or a Request for Proposal (RFP). The RFP should contain sections, such as submission details, an introduction and executive summary, an overview and background of the business, detailed specifications, assumptions and constraints, terms and conditions, and selection criteria.
4. Evaluating the proposal & selecting the vendor
To begin with, conduct a preliminary review of all your vendors’ proposals. Discuss with your management team and assign important values for each requirement. Next, assign a performance value for each requirement. Now all you have to do is calculate a total performance score and choose the winning vendor. The vendor with the highest score has to be selected.
5. Creating a contract negotiation strategy
Creating a contract negotiation strategy is the final step in the vendor selection process. Rank your priorities along with alternatives. Clearly define benchmarks and time constraints. Evaluate your risks and liabilities. Also state the level of confidentiality required. Remember to mention changes in the requirements. Understanding the difference between what you want and what you need, from the outsourcing contract, can help you create a better strategy.
Implement a Vendor Scoring and Selection System
Companies can use RFPflow offering a tight integration of the Source-to-Pay (S2P) suite to standardize Source-to-Contract processes across teams and business units. Built on ServiceNow, RFPflow is easy to implement and simple to use, which translates to better vendor selection and evaluation. With the help of RFPfllow, companies can spend less time dealing with discrete data and gain the benefits of collaborative sourcing.
Realize the Potential of Vendor Contract Management
Vendor contract management is a well-managed process for handling all agreements with the vendor from start to finish. This includes all aspects of the contracts, such as:
- Individual authorized for signature
- Central storage of these contracts
- Tools used to track these contracts
- Key provisions & KPIs that must be included in the contract
- Ways to protect customer information
Of all the areas of vendor management, perhaps the most difficult is handling contracts effectively with each of these vendors. Whether it’s negotiating, tracking, or simply finding all of them, contracts can be a real challenge.
Implementing an Effective Vendor Contract Management System
Contract management isn’t an easy process – it requires a commitment, not only by the parties involved but by the entire organization to make sure that agreements are entered into only in a very prescribed, controlled, centrally managed, and uniformly enforced manner.
Companies can use RFPflow together with the Contractflow suite to eliminate the source-to-contract gaps caused by stand-alone procurement and sourcing applications such as lack of visibility, redundant data entries, and data inconsistencies.
Choosing the Right Source-to-Contract System
Source-to-Contract (S2C) technology facilitates the upstream procurement process by automating sourcing activities such as Contract Management, Spend Analysis, Supplier Relationship Management, and RFX Management.
Source-to-Contract tools provide Purchasing professionals with the tools they need to effectively support the purchasing process thus lowering the overall procurement costs and eventually achieving higher operating profits. Most importantly, they help the Purchasing department streamline operations and obtain the best value through effective supplier adoption, evaluation, and communication.
And, Finally Before We Leave...
For all these vendor relationships to build & prosper, the bottom line is to select the best suitable vendor for the organization and successfully manage the vendor relationship via vendor contracts.
Whether you are looking to establish a vendor management process from the ground up or you are looking for ways to streamline your existing vendor relationships, a vendor management tool can help you implement your vendor management strategy rapidly.
The vendor management process, if handled in the right way with an optimal mixture of people, processes, and technology, can do wonders to plug in communication gaps and leverage the power of collaboration to drive more value out of vendor relationships.