Vendor Relationship Management: What it Is & How Automation Can Help

Published on December 28, 2023
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Vendor relationship management refers to the intentional steps that your business takes to promote healthy, productive connections with its vendors. As with any relationship, the key to encouraging positive, fruitful interactions between your company and its vendors is maintaining consistent, open lines of dialog. Poor communication can not only lead to disruptions in your day-to-day operations, but it might also have substantive, negative impacts on your customers.

Here’s what you need to know about vendor relationship management to take your business to the next level.

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What is vendor relationship management? 

To clarify, vendor relationship management covers any strategies, processes, or tools your business might use to monitor and promote positive vendor interactions. Ideally, these efforts will reflect formalized, intentional communications to keep expectations clear between both parties, leaving each satisfied after every business transaction.

Beyond communication, vendor relationship management also typically involves monitoring various key performance indicators (KPIs) to confirm that the entire procurement process is running smoothly and to identify any aspects of the relationship that may need discussion or adjustment. Commonly, you’ll want to monitor the performance of these areas:

  • Accuracy: The percentage of deliveries that precisely match the terms of their corresponding purchase orders and invoices.
  • Customer service: The speed and level of satisfaction achieved in resolving issues when they come up.
  • Market pricing: The cost of a particular vendor’s offerings compared to competitors.
  • Product or service quality: The number of deliveries that arrive without defect and the ongoing reliability of these goods or services.
  • Timeliness: The ratio of orders that arrive when or before expected.
  • Total delivery time: The amount of time between placing your order and receiving it.

Vendor vs. supplier

Colloquially, these terms are used interchangeably. However, there is technically a difference between their meanings. A supplier is a business that creates goods or services intended to be sold. Meanwhile, a vendor exclusively refers to a seller of products or services, meaning it doesn’t need to be responsible for creating the offering, such as a reseller or a retail business.

Therefore, a supplier can serve as its vendor — engaging in direct sales to the public — or it might operate through a network of external vendors and resellers to bring its products to market.

As more businesses have begun to operate in both capacities, the difference between the two terms has definitely eroded, becoming almost pedantic.

Why managing vendor relationships is important

Healthy relationships don’t just happen; they require work. As you put effort into cultivating connections, you’ll find it faster and easier to identify underlying challenges. Similarly, you can more readily determine what works effectively and replicate it across your vendor relationships, netting new efficiencies and cutting overall costs.

Similarly, if a vendor feels positive about your business, they’ll likely bring new collaborative opportunities to your attention — such as trying out new products or participating in pilots for more cost-effective delivery strategies. And if some service disruption occurs, like a supply chain shortage, your vendors will most likely prioritize supporting their long-standing customers with whom they have positive relationships rather than their “problem” clients.

Key benefits of vendor relationship management

  • Drive new efficiencies: As you gather detailed metrics over time, you can more easily identify and address process bottlenecks or capitalize on emerging trends.
  • Encourage competitive pricing: The more you know about the consistency and performance of a given provider, the easier it is to compare that business against other businesses.
  • Find better deals: With well-established relationships and communication channels, you can more easily capture available discounts or negotiate favorable credit or pricing terms.
  • Improve compliance: As expectations are clearly defined and regularly updated, your vendors will be much more likely to fulfill terms of service on the first try.
  • Streamline your supply chain: When you can track and predict the arrival of given deliveries, you can better map out and forecast your production efforts.
  • Strengthen business relationships: As successful, satisfying transactions stack up with a particular provider, you can be more confident this trend will continue.

Vendor Selection Guide for Automating A/R

How do you asses which A/R automation platform is right for you?

What is the vendor relationship management process?

So, what does vendor relationship management look like? Well, the first of two key pillars involves a lot of talking. Ideally, you’ll want to establish personalized, human connections with your vendors’ employees.  However, don’t over-rely on individual, person-to-person connections, as a change of staff at either company could reset the entire relationship.

Effective management efforts will include regular touchpoints with your vendor covering current projects, existing concerns, and future plans. Each of you will want to fully understand the priorities and operations of each other, allowing you to foster a spirit of collaboration that promotes mutual success.

The second pillar focuses on comprehensive monitoring and tracking efforts. With real-world data reflecting what is occurring inside each organization, you can easily identify what is and isn’t working. These key performance indicators (KPIs), in turn, should also be reported to decision-makers, who can leverage the underlying data to track the health and quality of the overall relationship.

What are the four stages of vendor relationship management?

Stage 1: Appraise

Your initial efforts will focus on evaluating current and potential vendors. Explore key performance metrics — profitability, pricing, product quality, cash position, and customer service rating — to identify which businesses you want to work with.

Stage 2: Discuss

Negotiating and clearly defining expectations, pricing, and credit terms at the beginning of the relationship is critical for ongoing success. And look for any collaborative opportunities you can leverage to improve the relationship — such as driving out unneeded costs from your shared supply chain.

Stage 3: Monitor

You and your vendor can execute the product or service order and subsequent delivery with an agreed-upon plan. Ideally, your initial discussions will have included goals and milestones for any planned transactions. Monitoring real-world performance against these targets can help you isolate inefficiencies, identify potential service violations, and even make it easier to detect invoice fraud.

Stage 4: Reappraise

This stage begins the process all over again. Alongside your consideration of general metrics regarding a given vendor, you can add your data regarding the exchanges that have recently happened. Are there any outstanding issues that still need to be resolved? Did the vendor meet expectations? Did physical reality follow your initial plans and negotiations, or did you need to make adjustments?

With this detailed information, you can more easily collaborate with your vendors to avoid future complications or make an informed decision to switch providers.

What is an example of vendor relationship management?

KWAKE Industries is a premier producer of holiday-themed beverages sold online and by big box retailers. Its widely successful Kristmas with a Kick Eggnog line of products relies on fresh ingredients purchased through a handful of dedicated distilleries, farms, spice companies, and dairies. Unfortunately, as Christmas approached, KWAKE needed to quickly find a new nutmeg vendor as its previous supplier—Nuts to You!—recently went bankrupt.

  • Stage 1: KWAKE began evaluating potential suppliers, paying particular attention to risk assessments and cash position statements. And the business soon isolated MEG’s Nutmeg Experience as a likely candidate.
  • Stage 2: KWAKE staff held discussions with the sales and production teams at MEG’s, negotiating for an aggressive delivery cadence and favorable credit terms.
  • Stage 3: With expectations clearly established, MEG’s began supplying KWAKE with its much-needed holiday spice. Meanwhile, the beverage company closely monitored the performance of this new vendor, hosting regular discussions to fine-tune operations, resolve problems, and plan for future shipments
  • Stage 4: Once the holiday had passed and a new year had begun, KWAKE reviewed this historic performance data alongside market research. It subsequently chose to maintain its relationship with MEG’s after a few contract modifications.

Challenges of vendor relations

Unfortunately, not all vendor relationships go as smoothly as the example above. Instead, you’ll likely run across various challenges and pitfalls, and part of effective vendor management involves adapting to and overcoming these issues. Some common problems you might run across with your vendors include:

  • Communication failures: If there are problems, you’re likely not talking enough. You must communicate with your vendor throughout each transaction, ensuring you agree with every process step. Otherwise, you courting confusion and inefficiency.
  • Inaccessible data: For a successful procure-to-pay cycle—particularly one where you make prompt, accurate payments—you’ll likely need to keep multiple internal teams (e.g., accounts payable, production, forecasting) current with details regarding vendor operations. Poorly-centralized processes and data stores can make this infinitely more difficult.
  • Non-compliance: Effective vendor relationship management relies on establishing clear, consistent expectations. And when your vendor repeatedly fails to meet quality standards or delivery timelines, the relationship can quickly sour.
  • Poor planning: No deal or delivery arrangement will adequately cover every potential pitfall or unexpected interruption, so whatever you agree to should cover the most common issues. Smart agreements will also include ways to modify plans and timelines as details on the ground change.
  • Process ignorance: If you aren’t accurately and routinely capturing performance data throughout the entire procure-to-pay process, you’ll have a harder time identifying potential improvements or resolving acute issues like process slow-downs or delivery errors. Similarly, assessing and reassessing individual vendor performance involves much more guesswork when actual records are unavailable.

What are the best practices in vendor relationship management?

To better avoid the challenges addressed above and to get your vendor relationships started on the right foot, you’ll want to build a management strategy that prioritizes structure and consistency. We recommend that you:

1. Drive decisions with data

Operating by guesswork and assumptions is a surefire way to undermine a given vendor relationship and cause cascading problems throughout your business. But when your critical decisions are backed by cold, hard facts, you’ll be much more likely to identify challenges accurately, plan your operations efficiently, and fulfill your outstanding obligations on time and within budget.

2. Establish clearly-defined processes

Before moving forward with your purchase, you should hammer out all of the transaction’s relevant process details—from payment terms to data formats to workflows and responsibilities. When all of these factors are agreed upon, there is much less opportunity for confusion or miscommunication to undermine an efficient exchange of goods or services for cash.

3. Pick the right partner

The cheapest vendor might not always be the right choice. You may need to focus more on the quality of the purchased materials, or you may need a provider that can match your just-in-time manufacturing efforts. As you decide, consider the entire relationship holistically to ensure that you’re selecting someone you can work with long-term.

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If you want to ensure that you’re taking sufficient measures to fulfill your end of the deal, check out our blog:

10 Accounts Payable Best Practices For the Ages ________________________________________________________________________

How to manage vendor relationships efficiently in 10 steps

Beyond general best practices, you can take several specific measures to promote healthy, stable relationships with your vendors.

  1. Be realistic: Being overly optimistic about plans or production cadences often means making changes mid-stream—instead, choose achievable targets.
  2. Educate yourself: The more you learn about your suppliers, the easier it will be to coordinate future transactions and business plans.
  3. Embrace transparency: Keep your vendor in the loop regarding your upcoming plans and any potential issues, like being unable to meet a payment deadline.
  4. Focus on mutual success: Remember that it’s a relationship, not a competition, so ensure that each organization’s needs and expectations are met.
  5. Leverage KPIs: Regularly create vendor scorecards that track performance over time, allowing you to make relationship-driving decisions based on reality.
  6. Over-communicate: Establish routine, consistent opportunities to discuss how the overall vendor relationship and individual deliveries are progressing.
  7. Pay early and often: Few things will earn you more goodwill with your suppliers than consistent, on-time—or even early—payments.
  8. Plan together: When you bring your vendors into discussions about the future of your business, you can schedule upcoming collaborations more easily and avoid unwanted surprises. At the same time, make sure you’re also spending time discussing your vendor’s priorities and plans.
  9. Recognize success: If your vendor does a good job, tell them. Send a note to management that highlights the performance of individual team members. Also, consider posting positive reviews online and recommending the organization to your business partners.
  10. Share risks: Rather than offloading all the uncertainty and potential fallout of supply chain challenges onto your suppliers, design your contracts to limit the overall impact these issues might cause for either business.

Invoiced: Automate your accounts payable to improve your vendor relations

Beyond these relationship-focused efforts, choosing the right technology can also prove critical to successful and efficient vendor management efforts. You want tools that can deliver consistent, reliable operations, and automation is perhaps the most efficient mechanism for delivering this uniform quality—especially as market conditions and business-to-business (B2B) payment strategies adapt and evolve.

With automated procure-to-pay workflows, you can avoid unnecessary delays and identify potential issues before they even occur. Similarly, the accompanying metadata for these processes can provide you with greater visibility into not only your operations but also those of your vendors.

At Invoiced, our Accounts Payable Automation and Accounts Receivable Automation software can help keep your payment processes running smoothly and without errors, making it much easier to simplify, structure, and coordinate your vendor relationships.To learn more and speak with an accounting expert, schedule a free, live demo today.

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Published on December 28, 2023
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