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Adam Ipsen | 03 Aug 2021 | 6 min read
Vendor Relationship Management in FY22: Best Practice Software, Tools and Methods
When managing your vendors, it can be all too easy to treat the process as purely transactional. You pay them, and they do what you want... right?
But as any good boss will know, this isn’t the way to get the best results. Before you know it, the relationship with your vendors is a bit stiff, and they’re sticking to the bare minimum required by contract.
So what’s the solution? Ditch the traditional transaction-focused approach, and engage in vendor relationship management.
What is Vendor Relationship Management?
Vendor relationship management (VRM) is exactly what it sounds like - a set of activities designed to improve your buyer-seller relationship. The core principle of good VRM is realising your vendors are people, and adjusting your outreach accordingly.
While this might seem obvious, this relationship nurturing can be lost in the day-to-day of regular procurement activities. In some organisations, VRM is a full time job handled by a vendor relationship manager. This person can sit anywhere from human resources to somewhere in the supply chain.
How and why does VRM make a difference?
There are a host of benefits to VRM, and most of these are for both buyers and suppliers. A structured approach to VRM helps by:
Minimising Risk: One of the aims of VRM is to avoid the breakdown of relationships. If things go sour, it leads to increased costs and loss of time.
Improving Quality: If your vendors know more about your needs - and you know more about what they can offer - this can lead to increased innovation and improvements in the quality of what they offer you. They’ll also be more willing to go above and beyond with your requests.
Preserving & Improving Your Reputation: Vendors talk, and you want to be known as someone easy to do business with. Not only is this good for your brand identity, but also vital for getting quality RFx responses in the future.
Ensuring Transparency & Compliance: The better your relationship with the vendor, the easier it will be to avoid confusion on what needs to be delivered. Also, it also makes both measuring KPIs and addressing underperformance easier.
Strengthening Communications: If you lay the groundwork and your vendors like you, news flows fast. You’ll be the first to know about updates on any changes with their products or services, as well as any upcoming opportunities.
Lower Total Cost of Ownership (TCO): The largest reason for underestimating the TCO is not having enough information to work with. Proper VRM involves methods for avoiding common pitfalls early in the sourcing process.
The best methods to manage vendor relationships
We’ve talked a lot about why you should spend time managing vendor relationships, but not a lot about how. Here are some of the best practice ways you can do that.
1. Build a long-term, win-win partnership
At the end of the day, your vendors are running a business, and they need to make a profit. Otherwise, it’s barely worth the price of doing business with you - and this attitude is going to bleed into the interactions you (and your buyers) have with them.
To avoid this, when you’re getting costs, don’t try and badger them for the lowest figure possible. Even though you might get short term savings, you’ll lose out when you get a lower-quality product or service - and be bottom on their customer priority list. In the worst case scenario, they may go out of business.
Instead, consider the merits of the Best Value Procurement approach. The supplier is more likely to consider you a valued customer and to dedicate extra time and resources to keep you happy, which means you get more in the long term.
2. Communicate proactively, and be transparent
Don’t forget to keep them in the loop with what’s going on in your business. Share your pain points and challenges. This lets them know where your priorities lie, builds trust, and gives them an opportunity to present possible solutions. Things you might share are things like expansion or relocation changes, or high level forecast information.
Don’t do this ad hoc - write a dedicated vendor communications plan on how you plan to keep in touch.
3. Use a dedicated software solution
Because many organisations have a large number of vendors to manage, VRM activities are typically supported by a dedicated software solution. Even if you have a dedicated in-house vendor relationship manager, this is still considered procurement best practice.
This stops the process being handled by things like email and phone, which are not efficient, transparent or easily auditable.
To learn more about contract management solutions that can help, read this article: The Ultimate Guide to Contract Management Software.
4. Learn about them, not just when you’re sourcing
Before you sign the contract, it’s natural to want to learn about your new vendor - and there are great supplier discovery tools out there to do that.
However, once you’ve made a deal, it’s important to keep an interest in your vendors, particularly their day-to-day challenges and opportunities.
By doing this, you’ll understand any capacity restrictions they might have, as well as early awareness of any product or service innovations.
5. Leverage their knowledge and build trust
If you’ve got a meeting that involves talking about their product or service, ask the vendor if they can send someone. After all, you purchased their services because they were experts in the field.Not only does this give you someone who can talk about the topic in intimate detail, any information will be up to date.
The good reason to do this is to build up trust between you and your vendor. They will see it as a platform to solidify their relationship with you, and also build awareness of their business with other internal stakeholders - promoting their value to the wider business for ongoing or future work.
6. Set clear expectations upfront, and document them
If you and your vendor aren’t seeing eye to eye on what they need to deliver, it will cause tremendous friction. You’ll feel you’re not getting what was agreed on, and they’ll feel you’re being unreasonable.To stop this happening, make sure you sort out everything upfront - key roles, timelines, check-in frequency, key milestones and any other requirements.
Make sure any benchmarks you set are measurable and reasonable. Nothing erodes a relationship like unachievable deadlines. This is particularly important when engaging in social or local procurement, where deadlines can be a particular pain point.
There are software solutions that make this process easier, such as Nimblex Procurement Planning and Contract Management.
These sorts of solutions give you a structured and transparent way of handling the process, and bringing in all the data you need.
7. Measure, but don’t micro-manage
To build a positive vendor relationship, it’s important to trust in them and their ability to deliver. At the same time, you want to make sure they do deliver, and keep on top of any compliance failures.
Again, this is where the right procurement software can be a great help, letting you:
Measure and keep track of vendor KPIs
See if they meet important compliance benchmarks
See what actions the vendor has conducted (responsible people, status, dates, and closure notes).
Any risks that have been raised (along with consequences, likelihood and rating)
Any general issues and communication going on
Why ethical vendor relationship management matters
When VRM is done correctly, it helps you meet your probity requirements. Vendors are treated as business partners who are well informed, and not misled at any time. You have also got to know about their business, and where they stand in terms of ethical conduct and compliance.
When engaging in social or local procurement, strong vendor relationships are especially important. This is because it may have a large impact on not just the vendor, but a whole community.
However, building a strong relationship does not mean giving the vendor preferential treatment. For instance, if in response to an RFx you are offered a clearly better deal by a new vendor, you may have an ethical obligation to your business to take that deal instead.
To solve this problem, make sure you use an evaluation and award tool that is completely transparent and audit-ready.
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