Why Vendor Management Matters in 2023 « CPO RISING – THE SITE FOR CHIEF PROCUREMENT OFFICERS & LEADERS IN SUPPLY MANAGEMENT

In today’s global economy, managing supplier performance has become increasingly important for companies to maintain their revenues and customer satisfaction. Supplier performance can directly impact a company’s success, making it essential to find and engage with high-value suppliers and manage their performance effectively. This article series aims to provide recommendations on how to get the most from vendor relationships and achieve best-in-class performance.

Vendor Management in 2023

Vendor management or supply management refers to the strategies, technologies, and activities that support the procurement and management of third-party goods and services. Effective vendor management is critical to controlling spend and maximizing the value obtained from suppliers. Investing in vendor management can help organizations drive value without the significant investment of additional resources. Therefore, it is important to focus on managing supplier relationships and performance to support business operations.

When examining the main elements of vendor management, there are several that require attention.

(1) Information and onboarding. Best practices for supplier information management include centralizing and standardizing the collection and management of all key sub-vendor information and improving communication to initiate collaboration. It is worthwhile to invest time and resources in building a source-to-pay process that engages and attracts suppliers. In terms of information and onboarding, it is important to proactively manage vendor information and get vendors involved in sourcing initiatives and utilizing contracts. The percentage of suppliers enabled on platforms that allow transactions is a leading indicator of an organization’s digital transformation.

(2) Compliance. Vendor management compliance in procurement is important because non-compliant spend costs the average enterprise an extra 12% to 18%. Yet, only 61% of spend is contract compliant for the average procurement organization. With today’s growing focus on ESG initiatives, there is increasing compliance pressure from customers, employees, and investors on businesses where stellar ESG credentials is emphasized.

Automating compliance, establishing clear communication, tracking and measuring compliance, and involving finance in the process can help procurement realize more value from contracts and strategic suppliers. Note that when it comes to contracts, standardizing and scaling processes can have a big impact on efficiency, budgets, and streamlined processes. Contract management solutions can also result in efficiency dividends for suppliers.

(3) Performance. There should be no surprise that vendor performance is important, and recent research shows that how suppliers perform is critical to operations. Half of the procurement organizations think that supplier performance has improved because of procurement’s efforts. If there’s value in the spend, there’s value in managing it better.

There’s a real opportunity for organizations to use contracts to manage vendor performance, and there are newer, more advanced contract management solutions to help procurement teams advance quickly. Traditional supplier performance management utilizes surveys and scorecards to measure how well the supplier is performing, but what’s often missed is the more quantified analysis of how the supplier performs against the details of its contractual obligations.

Contracts have become more complex as organizations and suppliers compete across a much broader range of value points, resulting in conflict. Often, a large gap exists between the stakeholders who complete the vendor performance surveys and the reality of how the vendor actually did. Here lies an enormous opportunity to collaborate with the supplier and go significantly deeper than classic vendor performance management.

(4) Risk. Supply risk is ever-present. Complementing your vendor management program with a supplier risk management component not only enables you to knowingly take on risk but to mitigate it as well. It is crucial to have a plan and a process in place to move swiftly through risk events when they occur.

A supply risk management program is a set of strategies, policies, and procedures designed to identify, assess, mitigate, and monitor risks associated with a company’s supply chain. These risks can include anything that could disrupt the flow of goods and services, such as natural disasters, political unrest, supplier bankruptcy, and cyber attacks. The consequences of supply chain disruptions can be severe, ranging from lost revenue and productivity to reputational damage and regulatory penalties. Thus, by proactively managing supply chain risks, companies can minimize the impact of disruptions and maintain business continuity. Additionally, an effective supply risk management program can help companies build resilience, strengthen relationships with suppliers, and identify opportunities for innovation and improvement.

Contracts can play a crucial role in managing vendor risk, particularly in the context of global supply chains that extend beyond first-tier suppliers to third parties. Gaining visibility into suppliers, third parties, and associated risks is paramount. Organizations need to focus not just on traditional financial and operational risks, but also on the new set of risks that increasingly fall to procurement and supply management teams to manage, mitigate, and avoid.

These risks include environmental disasters, infectious diseases, human trafficking, modern slavery, and geopolitical conflicts. Enterprises must also consider the risks of not meeting commitments made to the SEC, the market, and customers. The challenges of managing global suppliers have increased exponentially in recent years, and any enterprise whose digital or physical supply chain originates in and extends through a troubled country or region is put at risk by events occurring in other parts of the world.

In today’s business world, where supply chains can be extremely complex, it is crucial to have a comprehensive risk management program. Procurement teams need to proactively manage risk beyond the financial and focus on mitigating those risks associated with the new set of challenges that businesses face. By doing so, they can ensure that their organizations are better equipped to navigate the ever-changing business landscape and achieve long-term success.

In Summation

Vendor management has become increasingly important for businesses in today’s global economy. Managing supplier performance can directly impact a company’s success, making it essential to find and engage with high-value suppliers and manage their performance effectively. The main elements of vendor management include information and onboarding, compliance, performance, and risk. By investing in vendor management, organizations can control spend, maximize value, and drive business success. A comprehensive risk management program accounts for ever-evolving risks and puts the enterprise on a long-term path toward supplier collaboration and global competitiveness.