Want to learn how to improve procurement? Let’s talk Vendor Relationship Management

Supply Chain Operations

Supply chain operations is the process of acquiring the raw materials you need to produce the goods or services your business offers. While this may sound simple, supply chain operations involve a whole range of processes that need to be fine-tuned for organizational success. These include:

• Figuring out what you need, when you need it, how much you currently need or will need in the future
• How long your current stock will last, when you should begin to make a new batch
• How long it will take the needed materials to get to you, how long in advance you should place an order
• Who offers the highest quality of what you need, what is the cheapest possible price and if there any suitable alternatives

Phase 1: Procurement

The first phase, which is Procurement, is the actual buying of raw materials from suppliers. Here, we discuss techniques to help you identify and negotiate the best deals with suppliers and also how to manage your suppliers to ensure they always provide you with the best service. With practices such as demand forecasting and vendor management systems, you can optimize the procurement process.

Procurement in business conclusively involves making buying decisions on the instances of scarcity to ensure the purchaser receives goods, services or work at the most reasonably fair offer when factors such as quality, quantity, time and location are compared.

So, how can the procurement process be improved? One technique to improve procurement is to take care while managing your vendor relationships.

Regulate, Evaluate, Maintain And Manage Vendor Relationship

This refers to the processes or activities organizations use to manage their suppliers. It involves activities such as selecting vendors, controlling costs, ensuring service delivery, quality maintenance, reducing supplier-related risks, and evaluating supplier performance by setting standards or utilizing KPIs.

Doing all of this and more can be overwhelming for a person to do on their own, especially for businesses with several vendors supplying several different components— and that’s why we have VMS. A Vendor Management System (VMS) is an internet-enabled, web-based tool that acts as a single node for businesses to manage all supplier-related activities in any business while simultaneously cost-effectively ensuring efficiency and growth.

The benefits of Vendor Management are numerous and some of them include:

• Better value for products:the primary goal of a VMS is to save costs without compromising quality, and it does exactly that. Implementing a VMS properly can save you significant costs in the long run
• Better relationship with your suppliers:Naturally, some suppliers will not meet your expectations, and business with them will have to be terminated. The number of terminated contracts is given by the Percentage of Supplier Contracts Terminated KPI, which is the number of supplier contracts that must be terminated due to poor performance by the supplier divided by the total number of supplier contracts under management over the same period of time, as a percentage. For those suppliers who are compliant, VMS can help to improve your relationship with them by making readily available important supplier information in a single location that can help you better assess and coordinate your activities with your suppliers
• Improved contract and performance management: With VMS, the centralized data provides a wealth of information from which you can analyze and view the status of all contracts and other useful information which will enable you to make even better decisions and save time. You can also assess the performance of the various vendors with the data so you determine what’s working and what isn’t.

There are also some problems associated with vendor management though. Sometimes vendors are noncompliant and will not adhere to your set standards; this is documented with the Supplier Contract Compliance KPI, which is the number of suppliers that are meeting the service and quality levels as defined in the executed contract divided by the total number of vendor contracts under management at the same point in time, as a percentage. Other times it may become difficult to store all the relevant vendor data, especially in the absence of VMS. Some vendors have different payment methods, and this may make it difficult to complete payments on time. These are just a few of the problems associated with Vendor Management.

Here are some steps to follow to effectively manage your vendors:

1. Set clear, attainable goals

Outline your business goals, especially those which necessitate vendor involvement, this way, it is easier to track your progress and determine if your system works or not

2. Create a dedicated vendor management team

This team should be put in charge of all vendor-related activities or processes and it should consist of people skilled in identifying business goals, selecting and evaluating relevant vendors.

3. Create a vendor database

This database should contain all relevant information about every vendor your business works with. The availability of this data will ease the vendor management process, by making it easier to match business needs to the right vendor, evaluate vendor performance, easing the information finding process by storing it in a central location, and enabling more efficient budgeting systems.

4. Determine the selection criteria for vendors

Identify the most important selection criteria, what matters most to you when selecting a vendor? Is it the price? Or the product quality? After-sale service? Delivery service? Whatever is it, be sure to clearly identify and determine it.

5. Evaluate and select vendors

Using your selection criteria, evaluate what vendors are most qualified to meet your needs, and select the ones that best suit you. All vendors have to be thoroughly assessed and all things from pricing to the scope of work have to be considered before choosing a vendor. You can evaluate vendors by computing and analyze certain KPIs such as:

• Correct Supplier Order Rate:the number of orders received from suppliers or vendors that are correct (e.g., type and quantity of the materials) divided by the total number of supplier orders received over the same period of time, as a percentage.
• Materials Acceptance Rate: the amount of materials received from suppliers that are approved for use by the company on first pass divided by the total amount of materials received from suppliers over the same period of time, as a percentage.
• Materials Non-Acceptance Rate: the total number of instances in which supplies or raw materials are refused by company facilities due to errors in shipment or defects divided by the total number of supplies or raw materials shipments received by the company over the same period of time, as a percentage.
• On-time Supplier Delivery Rate: the number of orders received from suppliers on or before the committed delivery date divided by the total number of orders received from suppliers over the same period of time, as a percentage.

Develop and finalize contracts

After selecting a vendor, negotiating the contract is the next thing. We’ve already discussed extensively how to develop a contract earlier in the chapter. It is after this final stage that transactions can finally begin between the two parties.

Assess and improve

As we’ve said: better, constant evaluation and improvements are paramount in a business. Assess your vendor management process often to determine if and how it can be improved upon. There are a few ways you can improve your vendor management strategy, some of which are

✔Setting realistic deadlines:Sometimes expectations are simply impossible. Consider your business goals and set deadlines that can be met, if your deadlines are unrealistic and aren’t being met, it may come as across as your vendors being sub-optimal, when in fact the problem is your deadline.

✔Maintain a positive relationship with your vendors:We said before that vendors are your partners and not opponents, ensure you have a good relationship with them and collaborate with them to improve both your relationship and help each other to reach your goals. This can lead to a positive long term relationship which can be greatly beneficial to both parties.

✔Evaluate vendor performance:Establish KPIs to measure the performance of the vendors. You can use KPIs such as Cycle Time: Supplier Order Delivery, which is the number of business days required to complete a delivery of materials from company suppliers or vendors, from the time the order is placed until the materials are delivered,

✔Evaluate vendor performance:Establish KPIs to measure the performance of the vendors. You can use KPIs such as Cycle Time: Supplier Order Delivery, which is the number of business days required to complete a delivery of materials from company suppliers or vendors, from the time the order is placed until the materials are delivered, Supplier Order Documentation Accuracy Rate, which is the total number of supplier orders received with complete and correct documentation divided by the total number of supplier orders received over the same period of time, as a percentage, and Undamaged Supplier Shipment Rate, which is the total number of orders received from suppliers without any damage divided by the total number of supplier orders received over the same period of time, as a percentage.

✔Study Vendor risks:If you’re aware of the risks your vendors pose, then you can put systems in place to minimize or maybe even eliminate those risks completely. Risk assessment of a vendor is an important step to improve vendor management process and it is a continuous process. There are different types of risks, from operational risks to data security risks. Get the right people in place to assess and minimize these risks.

The importance of the procurement process as earlier stated is incredibly important to a business. Getting it right does not mean everything else will work smoothly; problems can always arise from anywhere. However, getting the process wrong automatically means that every process that follows will be riddled with problems. Follow our recommendations and you’ll have a truly optimal procurement process.

Final Thoughts

With just a few key changes and improvements, you can drastically improve the state of your procurement process and supply chain operations as a whole. A business simply can’t run at its peak performance without optimizing their supply chain operations– and tactics to improve procurement are a great way to begin this process.

By learning how to better manage vendor relationships, you can impact the quality of your partnerships with vendors and preemptively resolve issues before they even have the chance to disrupt your supply chain.

By learning how to better manage vendor relationships, you can impact the quality of your partnerships with vendors and preemptively resolve issues before they even have the chance to disrupt your supply chain.

Want more information on supply chain operations, and all things business? Don’t forget to visit the Profit.co blog, where our business experts break down the important topics that you need to master in order to get the best business outcomes.

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