Vendor relationships are complex. Every supplier your business depends on has different priorities, requirements, and expectations. Building solid partnerships with different vendors requires flexibility, coordination, and clear communication.
This is what vendor relationship management (VRM) is all about: building strong relationships with a range of suppliers to make sure that your business has what it needs and when it needs it. In addition to the soft skills you’ll need to build relationships with vendors, you also need the right tools and a solid strategy.
Below, we take an in-depth look at managing vendor relationships and the tools, systems, and strategies needed to successfully build a network of reliable and trusted vendors.
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What is vendor relationship management (VRM)?
Vendor relationship management is the discipline of nurturing relationships that create positive outcomes for the business. VRM refers to both the communication and effort it takes to build these relationships, as well as the tools (usually software) it takes to sustain the relationship and manage interactions. The goal of VRM is to build connections that allow both the business and its suppliers to extract the most value from the vendor-customer relationship.
In addition to strategy and communication, VRM includes elements of planning and data sharing. By sharing information, vendors can better anticipate and meet your business’s needs and expectations. At the same time, this collaboration helps procurement teams understand the vendor’s processes and requirements, which establishes alignment and prevents miscommunications, delays, or errors.
When partnerships with vendors are well-managed, businesses avoid common problems such as unexpected disruptions to their supply chains or unplanned expenses due to logistics or price changes.
Why is VRM important?
VRM, as a strategy, is a relatively recent development. Previously, businesses relied on personal connections and individuals to establish, nurture, and manage relationships with their vendors. But this approach has some drawbacks. First and foremost, it lacks continuity. If a key partner (on either the vendor side or customer side) leaves the company, the relationship may have to be reset. Second, it often lacks the degree of formalization needed to keep things predictable and consistent.
The point of vendor relationship management is to build long-term relationships that don’t just depend on individuals. It’s also a pivot in terms of business priorities. In the past, most companies spent more of their time, energy, and resources on customer relationship management (CRM). This makes sense, given that customers are the ones buying the company’s products or services and generating revenue. Over time, businesses realized that there was additional value in developing their partnerships with suppliers.
VRM does not diminish the emphasis on customer relationships. Instead, it compliments it by bringing vendors into the equation in order to create more value for customers, which can have a positive impact on revenue and reputation.
Some of the benefits of VRM include:
- Access to data and information that improve budgeting and cost forecast accuracy.
- Clear framework to support consistent communications.
- More opportunities for discounts or higher quality service.
- Deeper insights into vendor capacity and turnaround times.
- Better adherence to terms of service and SLAs.
- Ability to evaluate and compare vendor performance with more precision.
- Easier enforcement of compliance and security requirements.
Most businesses rely on software tools to manage the communications and information that yield these benefits. We’ll look at that aspect of VRM more closely below. First, it’s important to consider some of the common challenges to vendor management.
Challenges to effective vendor management
Managing vendors is a complex effort. While successful VRM delivers several key benefits for the business, there are also some challenges that should be anticipated.
- Lack of communication. One of the most common reasons for poor vendor-customer relationships is a fragmented communications process. In these cases, either there are problems with information handoffs or consistent follow-ups.
- Missing or incomplete information. Even when communication is consistent, missing or incomplete information — in forms, documents, purchase orders, or RFIs — can lead to delays, errors, and unnecessary rework, all of which can cause a relationship with a vendor to deteriorate.
- Unstructured processes. Vendor relationship management is only as good as the processes that support it. Without structured processes in place, vendors may become frustrated by inconsistencies in policy or procedure. Procurement teams will also find it difficult to manage multiple vendors without well-defined workflows and processes.
- Vendor conformity. At some point, every business will encounter a vendor who fails to meet your company’s standards in one way or another. They might not be responsive to your outreach or requests for information or data, or they may not adhere to the policies and procedures your team requires. This could result from a lack of clarity, inability to access information, or operational inefficiencies.
- Information accessibility. Even after your business establishes a relationship with a vendor, different teams or team members will need to interact with the vendor to manage procurement, invoice payment, or P2P processes. This means that they will need access to information about the vendor, such as account history, key contacts, account numbers, and SLAs or contracts. The challenge for many businesses is centralizing this information and making it accessible to all stakeholders.
- Vendor consistency. Companies rely on vendors to provide the same services, materials, or products with each order or update. If a supplier is not able to meet the same standards, it could alter your operations or delay or derail your plans.
Vendor relationship management best practices
Following some tried-and-true best practices can help any business overcome the challenges they encounter in their vendor relationships. These best practices focus on structure, consistency, and strategy.
Rely on structured processes. A wide range of processes and workflows connect businesses to their vendors. Ensuring that these processes are structured brings predictability and precision to the relationship and helps define expectations and protocols. This applies to any process involving the vendor, including the
- Purchasing process
- Procure-to-pay (P2P) process
- RFI, RFP, and RFQ processes
- Accounts payable process
Choose vendors that align with business goals. While it may be tempting to select vendors on price alone, there’s a lot of value in choosing vendors based on other criteria. Can the vendor help the business achieve its overall strategy? Does the vendor have the knowledge, personnel, and connections to help you deliver value to your customers? What about their reputation? Does the vendor have a history of taking good care of its clients and delivering consistent results?
Define expectations and policies. A company wants vendors who align with its goals and meet standards. However, suppliers and service providers need to know exactly what these expectations are. If they are unaware of the requirements, a vendor will make assumptions that might be inaccurate. However, with clear goals and standards, they have the insights necessary to offer their best products or services to you.
Make data-driven decisions. Most businesses rely on a complex tech stack of various systems and apps. Many of these collect data related to vendors, purchases, and procurement efficiency. Make sure data flows between these systems so that stakeholders have access to the information they need when they need it.
How to manage a vendor relationship successfully
Relationships are complicated, and those between vendors and their customers are no different. But like other types of relationships, there are some proven techniques for ensuring that they remain healthy for both partners. By nurturing, setting boundaries, and communicating effectively, businesses can build supplier partnerships that they can trust.
As with any type of relationship, communication is key. Communication is how questions get answered, expectations are set, and rapport is built. Effective communication means keeping others informed and minimizing surprises or even shocks.
In vendor relationship management, communication happens in different channels. Conversations may happen in person, over the phone, or through email or messaging apps. Some very important communication takes place through documents and form fills. The trick to good communication in VRM is to consolidate all these conversations, questions, responses, and notes into a single source. This allows both parties to reference their communication history and keep track of agreements, promises, or areas of disagreement.
Invest in the right technology
Technology can help simplify, structure, and coordinate vendor relationships. That’s because data and information play a crucial role in VRM, and technology can help manage it. Consider whether your current tech stack includes all the components needed to manage your vendors, including:
- Communications tools
- Data integration capabilities
- Forms and portals to capture information
- Document management
- Security and compliance enforcement
- Workflow automation
Increasingly, businesses are relying on low- or no-code (LCNC) automation to give their procurement teams the tools they need to manage their vendor relationships. LCNC is easily adapted to the existing tech stack, is cost-effective, and conserves IT resources by allowing procurement teams to build, modify, and automate vendor and supplier relationship management processes.
Every partnership with a vendor comes with some risks. Many of these are beyond the control of either party, so it’s a good idea to be realistic about what these risks might be, and how to deal with them if they ever arise. Different areas of your business identify different types of risks. The procurement team may be very focused on potential supply chain disruptions, while the IT team may be more concerned with security or compliance issues.
Start thinking about risk assessment early on in the vendor selection process, prior to or during the request-for-information (RFI) process.
Examining risks when dealing with vendors is key for your organization. This process starts before you contract with the vendor. You can request information to confirm any claims relating to expertise, years in business, crisis management, work history, and references. You can also pinpoint potential problems in the vendor’s industry, such as price changes or disruptions, and find solutions before such an event occurs.
Anticipate cultural differences
Globalization has created supply chains that extend around the world. This means that in addition to navigating time zone differences, businesses will also have to work around differences in culture. Stay mindful of national and cultural variations in communication styles and management models. It’s also helpful for procurement teams to stay informed about geopolitical events and factors that may impact the delivery of goods or services, such as natural disasters or holidays.
Familiarize yourself with the vendor’s industry
Finally, one of the best ways to manage vendor relationships is to better understand the vendor’s industry. This can help procurement managers set realistic expectations in terms of industry standards and trends, competitive activity, and changes in laws and regulations that may resonate throughout the supply chain.
Digitize vendor management with Pipefy
Teams that still manage their vendors through informal or manual processes are at a disadvantage. In addition to the amount of work and time these manual processes consume, they also introduce the risk of error and inefficiency. Even when the primary tools for VRM are spreadsheets and email threads, businesses miss out on an opportunity to bring operational efficiency to their VRM process.
Pipefy gives procurement teams a flexible toolbox they can use to easily build, modify, and automate vendor management processes. Pipefy relies on a visual user interface, so no coding is required. Features such as forms and portals simplify the collection of data and information, while rules and conditionals prevent missing or incomplete information and automate approval flows.
Learn more about Pipefy, and see what’s possible for vendor relationship management.