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Vendor relationship management: What it is and why it matters

by Sophia Riley

June 15, 2023

Efficient corporate management is crucial to ensure that your organization turns over profit year on year. Among other things, the key managerial positions are also entrusted with the task of maintaining healthy relations with the business partners. Vendors are one such business partners that cannot go unnoticed in the scheme of things. If your company relies on software and app development outsourcing, you must have a good relationship with your service provider in the SaaS space. 

Today, we have ushered into the third industrial revolution, which is centered around digital technology. The companies that have adapted to this change are moving forward exponentially. From providing best-in-class customer service to database management, your organization cannot function without robust technological support.

Additionally, your company’s quarterly performance will heavily depend on the performance of the software you deploy. Therefore, you must ensure that your SaaS vendors understand your organization’s core values and deliver on time. Also, the vendor should understand the needs and requirements and offer maintenance services accordingly. 

A good vendor relationship will help you save tremendously in expenses because you won’t have to maintain an in-house software development team. This will help maximize profit, and you can direct the resources to a supply-chain management system for better output. In this article, we will talk extensively about vendor relationship management, what it is and why it matters. 

Vendor or Supplier, what’s the right term?

Before we start our virtual session on vendor relationship management, we must clear some of our basics so there is no confusion midway. The organizations that have been around before the advent of digital space hardly differentiate between the two terms. In such corporations, you will often notice both these terms being used interchangeably, which is correct. 

If you occupy a managerial post in your company, you will first have to figure out how your company defines vendor and supplier. Once you are clear on this, we can move forward easily. Now, the companies that are operating extensively in the digital space use vendors and suppliers for two different types of service providers. 

Here, vendors are the ones who act as ombudsman and are third-party sellers of the software and applications, whereas a seller is the one who is a first-hand developer of the technology.

What is vendor relationship management (VRM)?

We have already covered what we mean by suppliers or vendors. Now, let’s address the elephant in the room. What is VRM? From a company’s perspective, which is also the buyer of products and services, a VRM means managing healthy relations with the business vendors. 

A company establishes vendor relationships by executing contracts or implementing efficient business strategies. Therefore, vendors form a crucial part of the core business operations. VRM essentially means that a buyer should ensure a healthy collaborative atmosphere for its vendors to ensure seamless business conduct. To this extent, companies deploy programs to ensure mutual benefit.

Additionally, if your company is planning to avail the service of a supplier for a long period, and you are responsible for vendor management, it is your duty to devise strategies to ensure consistent and prosperous business relations. In a much more technical sense, Gartner defines vendor relationship management as a “ discipline that enables organizations to control costs, drive service excellence and mitigate risks to gain increased value from their vendors throughout the deal lifecycle.” 

So, as a vendor manager, you must start by quantifying the impact that every vendor and the service provided by them have on the profit of the organization. You must also note the risk exposure each vendor has on the organization. 

This will help you categorize the vendors in order of relevance. You can use this segregated list to devise different strategies. This will help you develop plans to mitigate risk, increase profits, and add value to the organization. 

Why is Vendor Relationship Management Important?

A buyer and a supplier in a B2B setup are co-dependent on each other. However, for a buyer (the company) operating in the digital space, vendor relation is much more crucial because of the centrality of vendors in the company’s profit and risk factors. Therefore, as an organization, maintaining healthy vendor relations should be your priority. 

Good business relationships with vendors will unlock a lot of benefits, which will improve the profits and mitigate risks. Additionally, your organization’s smooth functioning will be ensured when the goals are achieved on time. A healthy collaboration will mean that the vendor will allow you to work closely with them so you can communicate your needs and requirements efficiently.

Good vendor relations will also ensure long-term collaborations, saving your time on market research for new projects. You can also improve your consumer service by maintaining good relations with your vendors. The quality of the product is also related to the kind of relationship you maintain with your vendor. 

Now, there are deeper benefits to this too. If you have availed the services of a vendor for a long time (which will be a result of efficient VRM strategies), the vendor will start to closely understand your organization’s operations and come up with solutions to beat the market competition. 

You may also get access to some [remium services, which can help in cost reduction and profit maximization. Therefore, VRM is quite important to boost the company’s overall performance. 

How to have efficient VRM practices?

If you are working in a well-established organization, chances are they will have a VRM system already in place. However, this does not mean that the system is working as efficiently as it should. Most companies have older people in key managerial positions who are quite traditionalists. 

Therefore, you can notice an orthodox approach toward vendor relations, which may be obsolete according to the current trends. Therefore, you can fine-tune the system to ensure a better collaborative environment for your vendors. 

But you should remember that every company is different because they are built on different values and principles. Also, the core operations concerning vendors are different for each organization. 

So, you can take some of our generic ideas and customize them according to your corporation’s needs. Here are some practices to ensure efficient vendor relationship management.

Adding a VRM solution may go a long way

In layman’s terms, we cannot ignore the relevance of technology in today’s fast-moving world. You can streamline almost any of your business operations and strategies by deploying efficient tools. Now, vendor relationship management using spreadsheets to manage an extensive list of vendors can be physically and mentally challenging. 

Also, the margin of error is quite high. An error in the vendor management system can multiply in the long run and cost your company a fortune. Therefore, this is high time to deploy automation tools to manage the grunt work for you. 

SaaS vendors already use CRM or customer relationship management tools to ensure closer engagements. Similarly, you can deploy VRM solution applications in the stack to improve vendor relations. With the help of vendor management applications, you can simplify the complex procedures of management.

Additionally, it will help you streamline the process and keep real-time track of the vendors. This is especially beneficial for organizations that have a long list of vendors. Some key benefits of automation tools include data-driven decision-making, elimination of hefty spreadsheets, efficient cost-tracking, etc. 

Performance mapping can be useful

As discussed earlier, one of the best practices to ensure efficient VRM is to categorize each vendor according to their impact on profits and risk exposure. Now, it is also important to track the performance of each of these vendors so you can bring necessary changes in operations and negotiate your terms of the deal accordingly. Vendors are like contractual employees for an organization. 

Therefore, just like your score your employees on their performance, you should score your vendors too. This is where VRM applications bring another utility. You can use these applications to track the feedback given by the stakeholders in real-time. You should keep a database of this feedback and analyze it annually to develop Key Performance Indicators (KPI). 

KPIs will help you quantify the performance of every vendor, which will help you in strategy building. However, do not address all the issues annually. If you think some issues are critical, address them immediately. 

To ensure a healthy working relationship, you can ask your vendor to maintain a KPI score for your company too. This way, you can come up with programs that are mutually beneficial and leads to better collaborative output. 

Take an interest in the vendor’s business

Traditionalists just concern themselves with the final product and the deadline. They hardly understand the internal operations of the vendor’s organization. It is high time for us to change that. 

Knowing the vendors’ business and operations inside out can give you a complete idea of their core business values, which will give you a better position when negotiating a deal. Also, it will give an idea that you are serious about your organization and won’t compromise on vendor quality. 

Also, visiting the vendor’s organization will give you a complete insight into how a product is developed from scratch, what are the testing methods, what all teams are deployed in the task, etc. 

This will help you when making negotiation strategies. Also, when you get deeply involved in the product development process, you develop efficient strategies to maintain long-term vendor relations. 

While visiting the facility, interact actively with the vendor representative to give an idea that your organization believes in core human values. This will strengthen your foundation with the vendor, and you may get best-in-class service for the same cost.

Choosing the right vendor is important

Different vendors have different business and development strategies. Therefore, all of these strategies may not align with your organization’s model. It is crucial to carefully choose vendors that will prove to be strategically beneficial for your company. Hence, it is the vendor manager’s responsibility to pick out the ones that are a perfect fit for the organization. 

You can only forge a stable and profitable relationship with those suppliers who are compatible with your organization. For this reason, it is important that you keep a checklist of indispensable factors that you seek in your vendor. 

For example, when settling on a vendor, take note of how he will be received by your customers. Also, see if the vendor’s business model is ideal for forging a long-term strategic partnership. 

Lastly, you cannot move forward without the assurance of pricing flexibility. A company’s performance is directly affected by market patterns, so it is crucial to have some room for negotiation in the future. If all these prerequisites are met, you can form a healthy relationship with your vendor. 

Convey your expectations clearly

When establishing a relationship with a vendor, it is crucial to convey your long-term goals and expectations. This will help the vendor in proceeding according to your needs and requirements. Also, if you think that there may be some challenges when working with a vendor, you should convey them early on so the vendor can make the required changes in time. 

It is best to incorporate your expectations and challenges in the contract to settle all future disputes seamlessly. If, at some point in the course of business, you realize that the vendor is unable to meet your expectations, which is hurting the company’s performance, you can execute a document with actionable requirements to clearly convey your company’s objectives to the vendor. 

Communication is the key

Effective communication has been at the helm of affairs when deploying a vendor management program for quite some time now. It is important to communicate with your vendors one-on-one and talk about your annual goals. You can also hold quarterly meetings to discuss performance requirements and feedback from the stakeholders. 

Use this opportunity to get a scorecard from the vendor too. This way, the vendor will understand his value in the collaboration and feel like an equal partner. Frequent communication will help your organization move on from formal needs and establish a deeper connection with the vendors.