How To Create A Vendor Management Program For Long-Term Results

Every business relies on vendors for essential products and services. These relationships can deliver desired benefits, but they can also deliver unwanted risks.

77% of organisations are concerned about regulatory compliance risks associated with third-party vendors, according to Deloitte. 

To maximise the benefits and minimise the risks, your business needs to manage vendor performance - and its relationships with the vendors - as effectively as possible.

Developing and implementing a Vendor Management Program (VMP) provides a structured framework to achieve both outcomes. It allows the execution of consistent and effective best practices for managing its vendors, preferably supported by dedicated technology.

This article provides some insights into a Vendor Management Program, covering:

• The purpose of a dedicated program 
• Key elements that should be included
• The benefits a vendor management program can deliver
• How a program can improve vendor relationships 
• How to create the program to maximise returns over time

The purpose of a Vendor Management Program

A Vendor Management Program serves as a framework that outlines the necessary structure, processes, tools and guidelines to ensure consistency, efficiency and effectiveness in managing vendors.

It ensures that your business’s goals are operationalised through specific vendor management activities.

Utilising a program enables your business to make the most of its vendors' capabilities and:

• Achieve reliability and continuity of its operations: identify, assess and mitigate risks that could disrupt supply chains or affect the delivery of goods and services. By proactively managing vendor relationships and implementing contingency plans, your business can minimise the impact on its operations of unforeseen events such as vendor bankruptcies, natural disasters or geopolitical disruptions
• Drive innovation and competitive advantage: foster collaborative partnerships with vendors, incentivising creativity and innovation, and leveraging their expertise to develop new products, services or business models. By embracing a culture of innovation and encouraging strategic alliances with key vendors, your business can differentiate itself in the market, respond to changing customer needs, and seize opportunities for growth and expansion
• Ensure regulatory compliance and ethical standards: perform thorough due diligence on vendors to assess their compliance with laws, regulations and industry standards, as well as their adherence to ethical business practices. By holding vendors accountable for ethical conduct and regulatory compliance, your business can mitigate legal and reputational risks to itself, enhance corporate governance, and cultivate trust and transparency with stakeholders
• Optimise costs and maximise value: conduct comprehensive vendor assessments to identify opportunities for cost savings, negotiate favourable pricing and contract terms, and optimise vendor relationships to extract maximum value from vendor engagements. By strategically managing vendor relationships and aligning procurement strategies with operational goals, your business can achieve cost efficiencies, improve profitability and enhance shareholder value
• Safeguard quality and reputation: implement rigorous quality assurance processes, conduct thorough vendor evaluations, and monitor performance metrics to ensure that vendors meet or exceed agreed standards. By holding vendors accountable for delivering high-quality products and services, you can enhance your customers’ satisfaction, build brand loyalty, and maintain a competitive edge in the marketplace.

Key Elements of a Vendor Management Program

These elements apply to your vendor management best practices and include:

• Vendor governance framework: outlines your business’s overall approach to vendor management, establishes the governance structure, names the team or individuals who will sponsor, oversee or own vendor management within the business, and describes their roles and responsibilities. It should define the authority levels, decision-making processes and escalation procedures for managing vendor relationships, and specify the tools and technologies to be used.
• Vendor policy and procedures: defines your business's policies, standardised procedures and guidelines governing vendor management activities. It includes requirements related to vendor qualification, vendor selection and contract development, contract execution and vendor onboarding, performance monitoring, risk assessment, and termination and offboarding.
• Vendor risk management framework: describes your business's approach to identifying, assessing, mitigating and monitoring risks associated with vendor relationships. It includes risk assessment methodologies, risk tolerance levels, and risk mitigation strategies tailored to different vendor categories and business functions.
• Vendor qualification and selection criteria: specifies the processes and criteria for evaluating and selecting vendors based on factors such as product/service quality, financial stability, operational capabilities, regulatory compliance and ethical standards.
• Vendor contract development: outlines the processes and procedures for negotiating, drafting, reviewing, approving and executing contracts with vendors. It includes standard contract templates, terms and conditions, and service level agreements (SLAs).
• Vendor performance monitoring and evaluation: establishes performance metrics, key performance indicators and reporting mechanisms for monitoring and evaluating vendor performance against predefined benchmarks and SLAs. It includes processes for conducting performance reviews, providing feedback to vendors and addressing performance issues.
• Vendor relationship management: defines communication channels, engagement strategies and relationship-building activities to foster positive and collaborative relationships with vendors. It includes mechanisms for escalating issues, resolving conflicts, addressing grievances and aligning vendor objectives with business goals.
• Vendor compliance and audit: aims to ensure maximum compliance with regulatory requirements, industry standards and internal policies governing vendor relationships. It includes processes for conducting due diligence on vendors, assessing their compliance posture, and conducting periodic audits to verify adherence to contractual obligations and regulatory requirements.
• Vendor continuity and contingency planning: establishes plans and procedures for managing vendor continuity and mitigating risks associated with vendor dependencies. It includes contingency plans for managing vendor disruptions, transitioning to alternative vendors, or when applicable, bringing services in-house in case of vendor failures or disruptions.

The Benefits of Following a Vendor Management Program

The benefits your business can receive from more effective vendor management practices include:

• Increased operational efficiency, minimised process inconsistencies and errors, and faster turnaround times for vendor management activities
• Minimised disruptions from vendor issues, enhanced business continuity and improved decision-making based on accurate risk assessments
• Improved vendor service delivery through early identification and addressing of actual and potential performance issues
• Reduced regulatory attention when dealing with highly compliant vendors
• Better collaboration and trust with key vendors, improved communication and problem-solving, and potential for innovation through joint initiatives
• Lower procurement costs through better vendor selection and negotiation, and maximised value extracted from vendor relationships
• Rapid adaptability to changing market conditions and the vendor landscape from regular reviews and continuous improvement of the VMP’s effectiveness

How a program can improve vendor relationships

Your vendors can also benefit both directly and indirectly from your business’s use of a vendor management program when it delivers:

• Consistent expectations: programs typically outline clear performance metrics and expectations, ensuring that vendors understand what is required of them and can align their efforts accordingly
• Enhanced vendor visibility: vendors may gain greater visibility within the business, leading to more opportunities for future business and referrals
• Improved payment practices: VMPs often emphasise timely invoice processing and payment terms. This can ensure vendors receive payments faster and improve their cash flow, potentially leading to preferred-customer status
• Long-term partnerships: by participating in a program, vendors can demonstrate their commitment to meeting customer needs and fostering long-term partnerships based on trust and reliability
• Lower risk of disputes: clear communication and defined processes within a VMP can minimise misunderstandings and disagreements over deliverables or payment terms
• Reduced admin burden: VMPs can define a clear and efficient process for onboarding new vendors and offboarding those who are no longer required. This reduces administrative burdens for both parties
• Risk mitigation: vendors can benefit from the risk assessment and mitigation measures incorporated into VMPs, reducing the likelihood of disruptions to their operations and ensuring continuity of service to customers
• Streamlined communications: VMPs often provide clear communication channels and guidelines for interactions between vendors and customers, leading to smoother collaborations and fewer misunderstandings
• Timely performance feedback: regular performance monitoring and evaluation within a VMP framework provides vendors with clear and timely feedback on their performance. This allows them to identify areas for improvement and demonstrate their value to the customers.

How To create a vendor management program for Long-term Results

A vendor management program must stay relevant as the business evolves internally and externally. This means staying alert to changes that could impact its effectiveness.

There are two routes to sustaining a VMP’s ongoing relevance.

Incorporate adaptability

To make sure a vendor management program is ready for different situations and fits well from the start, your business can use these strategies:

• Customisation and flexibility: Design the program with built-in flexibility and customisation options to accommodate your business’s unique needs and evolving requirements. This may involve developing modular components or adaptable frameworks that can be tailored to different business units or vendor categories.
• Risk assessment and scenario planning: Proactively conduct comprehensive risk assessments and scenario planning exercises to anticipate potential challenges and identify mitigation strategies. By assessing the likelihood and impact of various risk scenarios, a business can incorporate readiness measures into the program to mitigate potential disruptions.
• Stakeholder engagement and alignment: Involve key stakeholders from across the business to ensure alignment with business objectives and requirements. Consider input from business functions such as Procurement, Legal, Finance, and Risk to capture diverse perspectives and foster buy-in.
• Training and capacity building: Establish initiatives to equip employees with the knowledge and skills necessary to implement the program. Ensure that personnel involved in vendor management activities understand their roles and responsibilities, and the procedures outlined.

Continuously improve

Regularly evaluate how well vendor management practices are working, gather feedback from stakeholders, and make any needed changes to improve the program's effectiveness and relevance over time. Assess the following:

• Business size and complexity: As your business expands through growth, acquisitions, or mergers, operating in different regions with various units or subsidiaries, it may need a program that's broader, more targeted, and flexible to accommodate its scale and complexity.
• Industry and regulatory environment: Changes to existing applicable regulations, or diversification into different industries or geographies, can subject your business to varying regulatory requirements and standards. Your program must be adapted to align with industry-specific or country-specific regulations and may face much stricter compliance requirements.
• Nature of vendor relationships: Several aspects of your business’s vendor relationships, such as the types of products or services it obtains, the criticality of certain vendors to its operations, and where those vendors are geographically located, can over time require updates to the design and implementation of a program.
• Risk appetite and tolerance: Factors like the financial stability, operational resilience, and reputation of your vendors can alter your business’s risk appetite and tolerance levels. Such factors can require adjustments to a program to reflect the business’s risk management philosophy.
• Technological infrastructure and capabilities: The ever-increasing rate of technological change can easily render a business’s approach to its program obsolete, ineffective, risk-inducing, or all of the above. Leveraging Vendor and Contract Lifecycle Management (VCLM) software can help streamline and accelerate how you manage your vendors.

Wrap Up

A well-designed Vendor Management Program provides the framework, tools and best practices necessary for businesses to:

• Manage their vendor relationships effectively
• Focus on mitigating risk
• Optimise vendor relationships
• Achieve strategic objectives
• Deliver long-term value

With the right plan, you can take vendor management from reactive ad hoc activities to a proactive, consistent and structured approach that is critical for business success.

To learn how Gatekeeper can help in the management of your vendors, don't hesitate to get in touch with us.