Managing vendors is a complex process which, if done right, can deliver many rewards for a large organization. Large organizations have many vendors that provide products and services. Included in these vendors is a subset of vendors called strategic vendors whose products or services are essential to the operational performance of the company. Poor performance by strategic vendors can result in late shipments, faulty products, legal liability, environmental problems, poor publicity, higher costs, or lost profits. Clearly it makes sense to track the performance of these strategic vendors carefully to reduce risks (an essential part of procurement) and maintain a high level of vendor performance.
The challenge to managing vendors and monitoring their performance entails interactions with many different vendors, departments, geographic locations, and people within the company. This cannot be done well without using some type of automation. This article will provide an overview of some of the goals that a company might have in implementing vendor management software. It will also outline key data that company should collect and metrics that the company should measure. Finally, it will explain the functionality that vendor management software should include in order to maximize the benefits to the company, track vendor performance, and mitigate risk.
The goals of a vendor management software implementation should match the goals that the company has for its supply base (which should match the goals of the company overall). It is important for the purchasing organization to have very concrete goals in mind for the vendor performance management project as a whole. Some goals that purchasing personnel may set include: improve vendor performance, improve vendor selection, identify risks, develop the supply base, predict performance, segment the supply base, prepare for audits, and reduce costs (2005 Aberdeen Supplier Performance Benchmark Report). The following sections provide more details on each of these areas.
Improve Vendor Performance
For many companies, raising the performance of their vendors is the main reason for purchasing vendor management software. By having a system in place that centralizes vendor performance data, a company has the capability to collect, store, and use meaningful data on supplier performance. This data can be used to measure and track vendor performance over time. If there is a problem, the company will know about it quickly and can take action to correct the vendor’s performance, work with the vendor, or to locate a new supplier.
Improve Vendor Selection
A system that manages vendors and tracks vendor performance data can also be used to improve the process of selecting a new vendor. With vendor performance data in place, sourcing personnel can make better decisions on the quality of a vendor’s goods and services and can determine whether or not to renew a contract. Additionally, the KPIs for that product or service and an understanding of the risks can help sourcing personnel write better requirements documents and make better decisions in the vendor selection process.
One of the key goals for many vendor performance management programs is the identification of risks. Having centralized and regular data on supplier performance and quality helps to identify supplier issues before they become a costly problem. A drop in the quality of goods delivered by a supplier can mean that the supplier is cutting corners or that the company’s manufacturing procedures may need to be reviewed. An increase in late shipments could indicate financial or raw material problems at the vendor. Having performance data trends can provide the advanced signals needed to identify risks before they adversely impact operations.
Developing suppliers is another important goal that can be achieved through the use of vendor management software. It can be hard for suppliers to improve if they don’t have specific and actionable feedback on how they are falling short. By encouraging vendors to have high standards, excellent quality control, and best in class processes, a company can help its suppliers to achieve high performance goals. Having accurate measurements of supplier performance and sharing this information with other people in the company and with the supplier is one way to do this.
Consolidate the Supply Base
It can take a lot of work to manage multiple suppliers of the same product or service. For some items that the company buys, it can make the most sense from a quality, cost reduction, and time management standpoint to consolidate buying of the product or service through one vendor. This can allow the company to maximize volume discounts and can simplify the process of managing the relationship. Vendor management software helps reach this goal since vendor information and performance data are readily available and can be used to make decisions on which vendor is the best for the company.
In addition to tracking performance, vendor management software can help to predict supplier performance in the future. By periodically tracking supplier performance and changes in supplier performance over time, it is possible to develop trends and extrapolate likely performance into the future. This can allow a company to take prompt corrective action and to stop a problem before it becomes a hit to the bottom line or a all out disaster.
Segment Supply Base
Vendor Management Software can also help companies effectively segment their supply base to better target sourcing initiatives or KPIs. Segmentation can be accomplished more easily because with vendor management software vendor and performance data is stored in a central repository. Vendors can be categorized by their offerings, by industry, or even by other breakdowns. This makes it easy to locate qualified suppliers, to make comparisons between suppliers, and to use this data for other systems or company initiatives.
Prepare for Audits
Another benefit of having a vendor management system is audit preparation. With supplier data readily available and continuously updated by suppliers and internal personnel, it is much easier to be prepared for an audit. Additionally, effective use of supplier performance data can also boost risk control measures and can enable the company to put in a process that will give it more control over risks.
Having effective vendor management software will also help to reduce costs and increase efficiency for the purchasing organization. With vendor management software a company will not need to devote as many people to the process as it did prior to the software. The company will also be able to do a lot more with its supply base using the same amount of resources. This will generate additional process and cost savings.
One of the most important things when implementing vendor management software is to decide what data needs to be captured from suppliers. Almost all companies capture certain information from their vendors. The information requirements for strategic vendors are often greater than for non-strategic vendors. Information that almost every company needs to collect include financial metrics, contract compliance, operational performance, and business process data. Additionally, each company will also likely wish to collect other data that it has found to be important for its suppliers and unique business needs.
Almost every company cares about he financial health of its suppliers. At best, a bankruptcy is an inconvenience and at worst it is a loss of a lot of money or a disruption of supply. The financial health of a supplier can also inhibit a supplier’s ability to perform well or to control costs effectively. To capture important financial data from a supplier, a company might wish to obtain information on the company’s profitability, revenues, growth, etc. The company might also want to track important changes of ownership like a merger, acquisition, divestment, etc. The data collected should be reviewed and updated periodically at specified intervals.
It is always helpful to know if a vendor did what the vendor promised in the contract. This is important for maximizing the value of the relationship with the vendor. The metrics that should be measured for contract compliance will vary depending on the vendor category and the terms of the contract. It is often helpful to have common contract terms in vendor agreements to make comparisons easier.
Companies often use vendor management systems to collect data on a vendor’s operational performance. Some operational data that a company might collect could include the vendor’s quality, lead times, service levels, etc. The group or the department that is using the vendor’s products or services can measure the quality of those goods or services. By tracking lead times, a company can know the amount of time it will take the vendor to provide the products or services. This type of data can be used to measure the vendor’s performance and overall capabilities.
Information on a company’s business processes can be quite important for larger contracts. Some data that companies might want to collect might include the defect rates, quality certifications, inspection processes, audit procedures, etc. This data is useful to determine whether the company’s processes are the best that they can be and is also helpful in preventing future quality problems. With strong processes in place, the risk of a disaster can be mitigated.
In addition to the information listed above, companies also may want to collect other data that is important to them or data that does not fit within these categories. Some of this data can include MWBE certifications, sustainability practices, labor practices, etc. Almost all companies need to track the minority and woman owned makeup of their supply base. Companies that have overseas suppliers often need to track a vendor’s labor and sustainability practices.
To meet the goals of managing the supply base and to collect and store the data that is required, a vendor management system needs to have a lot of capabilities. Some of these capabilities include supplier registration, profile management, a centralized repository for data, reporting, visibility, status updates, certifications, risk management, corrective actions, a KPI framework, connect to other systems, and in some cases support EDI. The sections below outline this functionality in additional detail.
A vendor management system needs to have self-service supplier registration. This is an important part of obtaining new suppliers. Once the suppliers have registered, other supply personnel can quickly qualify them if the information that they provided fits in with the purchasing policies of the company. The registration process should also be quick, intuitive, and the process should be streamlined. Also, suppliers should have access to any documents that they need to sign up.
Once a supplier has registered, a supplier can update their profile information as it changes. This way the company will have up to date vendor contact information and access to a vendor’s capabilities as they change. It also saves time since a company employee does not need to actually contact the vendor to update this. A company may also require the vendor to update the profile periodically in order to continue to do business with the company.
With a vendor management system, all vendor information along with performance data is stored in a centralized repository that is accessible over the web. This way, people from different company locations and departments can all make use of centralized vendor data. In addition, storing all of the information in one place prevents duplication of resources, miscommunication, and saves a lot of time. This repository and the ability to meaningfully access the data within it is a valuable resource for managers and other personnel that need to make important supply decisions.
Reporting and Visibility
Vendor management software should have detailed reporting and visibility. This visibility includes reports and snapshots on each vendor that outline vendor performance and track changes over time. In addition, other reports should include data across vendors or key supply categories. Detailed searches and browsing should enable company personnel to review data on a particular supplier or a set of suppliers. This way, the company is able to get a real time view of the supply base and find the information that is needed quickly. Management can also obtain snapshots and high level reports to determine the success of broad initiatives and plans.
Status updates are important for strategic vendors. The purchasing department should spend most of their time on these strategic vendors and status updates give purchasing personnel real time updates in the case of a change in performance or an important update to the supplier’s risk or performance profile. Status updates can also provide the company notice that an important certification is expiring soon. Notifications can also be set to inform company personnel of important events like a change of ownership or important new supplier customer wins.
Vendors often have multiple certifications that can be used to substantiate their business practices, quality, or minority status. Vendor management software should be capable of tracking these certifications. Company personnel can monitor the ones that are required for conducting business with the company, and can send reminders to vendors to update their certification or their status periodically.
In addition to the information listed above, vendor management software should be able to assist company personnel in managing risk with both strategic and non-strategic suppliers. This would include providing some of the functionality listed above, but also may involve tracking changes to a supplier’s risk profile over time and recording the results of quality evaluations, site visits, or supplier audits for strategic suppliers. A good vendor management system will include the capability to add this extra data.
Ideally, once a problem has been identified, purchasing personnel will implement corrective actions for the supplier to address the problem. The software should also include the functionality to add corrective actions and to specify the actions that the supplier needs to take to address the problem. It should also help purchasing personnel to track the results of the corrective actions and to review their effectiveness. With the results of the action and the new data, company personnel can make better decisions on what to do next.
The software should also provide purchasing personnel with a framework that can be used to set important key performance indicators (KPIs). Once company personnel have identified the key performance indicators for a particular category or supplier, they can set up ways to measure those KPIs for a particular supplier or group of suppliers. The software should also support that process.
Connection to Other Systems
Some companies may want the vendor management software to connect with other systems to deliver even more value from the supply base. Some systems that can commonly be connected to the vendor management software include:
- Other ERP systems
Connecting to these systems can save company personnel a lot of time, make buying more efficient, and can improve interactions with the supply base.
In addition to connecting to other systems, some companies may want to exchange information with their suppliers via EDI. Planning (830) and shipping schedules (862) are often items that manufacturing companies would like to transmit or present to their suppliers using EDI. The company’s business type will determine the type of information that should be exchanged using EDI. This can help to further leverage the value of a vendor management system.
When selecting a vendor management solution, it is important to make sure that the vendor management solution will be able to support the business processes that are needed to collect, store, and retrieve vendor and performance data. This means that the functionality of the solution should accommodate the goals of the company. The automation should also include the tools needed to collect important data. Finally, the solution should also have the right features to effectively manage the supply base.