What is Vendor Management? Definition, Process, and Tools to Manage Your Vendors (2023)

What is vendor management?

Let’s understand this concept with a simple example.

Did you ever wonder why a flock of birds usually flies in the V-formation?

It is because V-formation increases their efficiency while traveling long distances.

Every bird needs to fly in an orderly manner to ensure that the flock reaches its destination despite all the hurdles.

Similarly, your vendors must play their roles perfectly, to achieve your organization’s goal.The goal of reaching and delighting as many end-users as possible. Because, when you reach your goal, everyone benefits – the end-users, your vendors, and you.

To establish this level of coordination in your company, vendor management is essential.

What is vendor management?

Vendor management is the process of coordinating with vendors to ensure excellent service to your customers. It involves onboarding vendors, training them to use your platform, and engaging with vendors for improved profitability for both—your vendors and you. Vendor management also involves measures to control costs, mitigate risks, and improve vendor performance.

Nonetheless, managing vendors comes with its own set of challenges. Let’s look at them.

Challenges in vendor management

Your vendor management process generally depends on:

  • Location (developed vs. developing nations)
  • Market maturity (Are vendors aware of your platform or similar platforms?)
  • The complexity of your process and tools you use to manage your vendors

To bring a broader perspective, we spoke to experts about the vendor management processes in the American and Indian markets.

Jim Goodrich, Co-founder of Continuous Process Improvement Systems, South Carolina Area, divulges the challenges that he faced in managing vendors. He says:

“In my experience, a big challenge was performance management. It may be considered as a part of overall contract management, satisfying terms, and conditions over time. Reasons for issues include that terms and conditions should change over time if managed actively.”

According to Jim,

(Video) Vendor Management | Webinar

“Not all suppliers should be managed the same. And this includes performance measures and performance review meetings.

Strategic, Leveraged and Critical Suppliers will have more extensive face time with higher execs and 2-way communications on possibly changing terms and conditions as market and other factors change—at least more so than those suppliers providing paper clips or office supplies.”

That’s a perspective from the developed world.

Managers in the developing nations like India face a different set of challenges. Covering inputs from Mr. Kumar Harshdeep, Former Vendor Manager at Flipkart.

“The major challenge with vendors in tier-two cities is educating them about the company’s selling platform. If the process is not explained properly, it increases the probability of mishandling orders. Eventually it affects their performance.”

During our conversation, Harshdeep shared an incident that further cements the need for proper vendor management.

“Once I ordered a product from a website that came with a note inside the packaging. It was from the seller. He requested to write a review on the online platform, and in return, he’ll credit Rs. 100 in the buyer’s digital wallet.”

Incidents like this usually go unnoticed. People order from big companies because they trust them. Any unethical activities such as this can mark a black spot on the organization’s reputation forever.

Hence, laying down guidelines on customer interaction, among other things during the vendor management process is essential.Let’s look at the process of managing vendors in detail.

What is a vendor management process? What are the steps involved in vendor management?

Simply put, vendor management process is the set of directives to shortlist, onboard, and engage with vendors.

Essentially, it involves 7 steps.

  1. Assess the vendor
  2. Establish goals
  3. Negotiate a contract
  4. Onboard the vendor
  5. Monitor their performance
  6. Communicate regularly
  7. Reward their performance

Let’s look at each of these steps in detail.

1. Assess the vendor

Before onboarding any merchant, assess them for the quality of their product, time to supply, pricing, network, and reliability.

You’ll be surprised to know that 87% of organizations have encountered a disruptive incident with a vendor in last three years. In fact, 82% of companies aren’t sure if they’ve identified all third-party risks.

(Video) SOP: Vendor Management

What is Vendor Management? Definition, Process, and Tools to Manage Your Vendors (1)

Many organizations use scorecards for examining their vendors. For example, out of 100, they allot 10 points for quality, 40 points for pricing, 20 points for supply time, etc.

The goal of analyzing your suppliers is to vet them for a long-term relationship. It’s important to identify if they can consistently deliver the promised output and quality.

2. Establish goals

To meet your sales goals, set up clear objectives for your vendors as well. More importantly, comprehend your business process in the utmost detail. It will help you structure and define clear performance metrics.

Convey your expectations and build a mutual understanding with your vendors. With strategic inputs, your vendors will be able to forecast your needs and maintain their inventory accordingly.

3. Negotiate a contract

To cultivate a relationship with your vendors, recognize and acknowledge their business objectives. For this, author a legitimate contract that is beneficial for both parties.

Negotiating too much for prices and restricting the profit margin of your vendor can hamper the quality of the product. To avoid that, plan the terms of the contract in such a way that they are mutually profitable.

4. Onboard the vendor

When your organization and the vendor land at mutually beneficial grounds, Sign the contract and onboard the vendor.

Theonboarding processinvolves guiding the vendor into your company’s network. A good vendor onboarding process guarantees the commencement of a smooth relationship.

Learn more about building an optimal vendor onboarding process through this webinar:

However, if you’re new, vendors may not know about your platform. In this case, you’ll have to build a team to go door-to-door and educate vendors about your platform.

But there’s one more thing that fast-growing marketplaces do. They employ field employees and use vendor onboarding tools to educate + onboard vendors in one go. For example, leading marketplaces like Amazon Pay, Meesho, and Dunzo use LeadSquared’s mobile app for onboarding vendors on the go.

What is Vendor Management? Definition, Process, and Tools to Manage Your Vendors (2)

5. Monitor your vendor’s performance

After conveying your expectations, you expect your vendors to work as per the indicated standards of contract. But most of the time, the situation is far from ideal.

(Video) What Is A Vendor Management Office? And Why You Need One!

You need to constantly monitor your merchants and ensure that they are working at their highest potential.

The vendors who perform exceptionally well are called as strategic vendors. Take their perspective while establishing new vendor policies or changing the current ones.

6. Communicate regularly with your vendors

On average, U.S. retail operations have a supply chain accuracy of only 63%. This can result in significant delays and re-stocking issues. For example, 34% of businesses have shipped an order late due to selling a product that wasn’t in stock.

It is possible to avoid such instances through regular communications with vendors about their stock, supply-network, and more. Many organizations hold gatherings and forums to talk about vendor issues. Here, vendors are guided and are provided with tips to improve.

7. Reward your vendors

Vendors see themselves as a part of the organization when you reward them for their performance. Organizing reward campaigns motivates your vendors and establishes a healthy competition among them. Vendor performance is beneficial for your company in the long run.

The importance of vendor management for the success your organization

Your success depends on your vendors’ success. And there is only one way to build good relations with vendors. That’s through effective vendor management. It helps you:

  • Catch up with the market trends: You can inform your vendors about an ascending demand in the market. Subsequently, you can also advise them to maintain their inventory to satiate the soaring need in the marketplace.
  • Leverage the opportunity to improve: Strategic meetings helps your vendors improve consistently. It gives them an opportunity to learn from other vendors and improve. At the same time, you can also learn from your vendors. For instance, their challenges. And provide appropriate solutions or tweak your processes to suit their needs.
  • Build long-term relationships: For a long-term association with vendors, it is essential to ensure that they are accomplishing their business goals. To that effect, vendor management assists them in realizing their goals by measuring their performance and providing inputs to increase their sales.
  • Provide better quality of products: The ultimate goal of vendor management is to provide a standard quality of products and services in a stipulated time and minimal cost. A proper vendor management process helps you ensure that the product quality and customer expectations are always met.

The above points clearly show why vendor management is important for the growth of your organization. However, setting up a process is just one piece of the puzzle. Executing it properly is a completely different ball game. In the next section, we will discuss how technology can help you ramp up your process.

Vendor management tools: how technology gives you an advantage

Software tools make it easy to onboard and manage vendors. When I say vendor, I talk about the entire conglomeration of suppliers, merchants, driving partners, and sellers. But before we discuss the benefits of using tools, a quick look at the features of an ideal vendor management software.

Activity logYou will need to understand how well your vendor interacts with your platform. Tracking activities will help you achieve that.
Centralized data repositoryHaving a central repository for all vendor-related information, compliance documents, self-help documents, contracts, etc. make it easy to access and use the information as and when needed.
CommunicationYour software should support communication through more than one channel, allow bulk messaging, and easy information exchange.
OnboardingThe onboarding module in your vendor-facing software should allow application, document collection, verification, and connect the verified vendor with your organization’s workflows.
PaymentsThe software should either provide payment functionalities or integrate with payment gateways.
Performance trackingTracking vendor’s every move is important to reduce risk and help them make more sales.
Self-service portalA vendor portal to upload documents, access transactions, and more.

Capture inquiries and perform screening

A lot of times you’ll receive business inquiries from sellers. Here, two main functions come into play:

  1. Capture inquiry into your central system,
  2. And assign the request to your team for verification and onboarding

Now, a lot of inquiries you receive might not fit your vendor selection criteria. Sometimes, it could be the region they operate in, or sometimes it could be the scale they’re not able to meet. Manually vetting them could be time consuming.

Vendor onboarding software qualifies leads based on predetermined criteria. It ensures a high-quality funnel and prevents you team wasting time on non-serious merchants.

Automate your processes

Simple processes like application, document collection, etc. can be automated. For instance, you can provide self-serve portals to increase merchant self-listing. Again, you can automate tasks like document collection through vendor portals.

You can also use your merchant management software to map vendors to your team members for vendor verification, onboarding, and other operational tasks.

Another use case of merchant management software is—automate engagement campaigns. As mentioned above, you need to communicate regularly and stay in touch with your vendors to keep them engaged. You can use software tools to ask for their feedback, send tips to increase sales, product and marketing updates, etc.

(Video) Vendor Manager Workspace | Overview

Equip you teams with smart tools

If your process requires field visits for your teams, tools like mobile CRM comes in handy. Your team can carry field visits with ease and update the vendor status through the app itself.

Some of the benefits of using mobile CRM for field teams are:

  • Share automated day plans to your team based on the leads assigned to them
  • Give meeting recommendations
  • Track if your team are at the right location and interacting with the right vendors
  • Collect documents and onboards vendors on the fly

Track your vendors’ performance

There are two main reasons why you should keep an eye on your vendor activities.

  1. Mitigate risks like vendors supplying faulty products, not delivering on time, etc.
  2. Identify top sellers, best-selling products, and more

Merchant management tools make it easy to track your vendors. You can utilize this information to motivate sellers who are trying hard to succeed on your platform. Data-driven insights through software will also help you make informed business decisions.

These are just some of the many benefits of using software to manage your vendor-related processes. And companies have realized success and fast growth with these tools. I would like to share the story of Meesho, India’s leading reseller marketplace, who improved its vendor onboarding efficiency by 70% through technology.

Success stories: how Meesho increases supplier onboarding by 70%

Meesho, an Indian-origin reseller marketplace, enables individual resellers to market their products through WhatsApp, Instagram, Facebook, and other social channels. Operating on a reseller base of over a crore, Meesho is spread over 5000+ cities and towns. In June 2019, it became India’s first-ever startup to secure funding from Facebook.

Meesho connects suppliers and resellers, where the suppliers take their inventory online and the resellers market those products to the end-user. With suppliers in such a key role, the company found it challenging to keep them committed. Also, as their team expanded, they needed a platform to onboard and manage their suppliers.

The solution:

Meesho, with LeadSquared’s vendor onboarding platform, found a solution to the chaos.

  • They automated the onboarding process with auto lead distribution and timely alerts to salespeople.
  • With workflow automation, operations and finance teams could easily access and verify vendor documents.
  • The team is able to track the journey of the vendor with them.

“Where an individual salesperson took around 8-10 mins to fill in the required details of a prospective supplier, with LeadSquared it just takes a minute. We are very pleased to see that the productivity of the team has increased to 70% from an earlier 5-10%.”

Saurabh Sudhanshu Tripathi, Senior Business Development Manager-Inside Sales, Meesho

You can also automate your vendor management process. Book a quick demo and explore how LeadSquared can help.


What is the vendor management process? ›

The vendor management process is a series of strategic and tactical activities that companies use to manage and collaborate with vendors. This includes setting objectives, establishing vendor selection criteria, negotiating contracts, strategizing for risk reduction, and controlling for cost and delivery.

What is vendor management systems and tools? ›

A VMS, or Vendor Management System, is a cloud-based software platform that solves a common problem for many global enterprises - how to find, engage, and manage its external workforce - both contract or contingent labor and services providers.

What is vendor management Meaning? ›

Vendor management is a discipline that enables organizations to control costs, drive service excellence and mitigate risks to gain increased value from their vendors throughout the deal life cycle.

How do you manage vendor management? ›

How to manage vendors effectively.
  1. Choose the right partners. ...
  2. Look to the long term. ...
  3. Set clear (and realistic) expectations. ...
  4. Communicate constantly. ...
  5. Measure performance.
11 Aug 2020

Why vendor management process is important? ›

Vendor management is the process that empowers an organization to take appropriate measures for controlling cost, reducing potential risks related to vendors, ensuring excellent service deliverability and deriving value from vendors in the long-run.

What is vendor management example? ›

Vendor management is a term that describes the processes organizations use to manage their suppliers, who are also known as vendors. Vendor management includes activities such as selecting vendors, negotiating contracts, controlling costs, reducing vendor-related risks and ensuring service delivery.

What tools are used to track vendors performances? ›

You can use a balanced scorecard (BSC) or a dashboard to track KPIs for optimal vendor performance management. Balanced scorecards emphasize global business objectives linked to KPIs, while dashboards focus on operational metrics and monitoring processes.

What are vendor management systems used for? ›

A vendor management system is typically used by a company directly to manage their independent talent pool, or by an MSP on behalf of a client, to better manage, and optimize their temporary workforce.

How do you select a vendor process? ›

Steps in the vendor selection process
  1. Analyze your business needs. When a company needs a vendor, it's important to decide the most important aspects to cover before hiring. ...
  2. Make a list of candidates. ...
  3. Meet potential vendors. ...
  4. Review RFPs and clarify details. ...
  5. Write a contract.
7 Jul 2021

What does vendor processing mean? ›

Vendor Processing means any information collection, storage or processing performed by Vendor or its subcontractors that: (i) directly or indirectly supports the Services or functions now or hereafter furnished to Customer; and (ii) involves the storage, processing, use or creation of, or access to, any Customer ...

What are the four stages to managing a vendor? ›

This blog discusses four steps for effective vendor management: assess, sterilize, stabilize, and optimize.

How do you manage vendor performance? ›

  1. Establish a strategy and a plan. ...
  2. Develop performance criteria and expectations. ...
  3. Determine the process steps and choose evaluation tools. ...
  4. Collect performance data. ...
  5. Measure the data against performance goals, and share results. ...
  6. Set improvement goals and create a plan to achieve them. ...
  7. Review and recalibrate.

Who is responsible for vendor management? ›

Who Is Responsible for Vendor Management? Ultimately, Senior Management and the Board of Directors are accountable for vendor risk management.

How can the vendor management process be improved? ›

6 Top strategies for effective vendor management
  1. Define your business goals. First and foremost, businesses must establish goals that clearly define performance parameters. ...
  2. Vendor Selection. ...
  3. Risk Management Process. ...
  4. Contract negotiation and contract management. ...
  5. Vendor onboarding. ...
  6. Reporting and monitoring.
23 Jun 2021

What is the importance of vendors? ›

Your vendors are critical to the success of your company. They drive new growth within your industry and ensure your able to achieve revenue and profit goals. They are at the heart of many of your organization's processes and activities.

What are the types of vendors? ›

The five types of vendors are manufacturers, wholesalers, retailers, service and maintenance providers and independent vendors and trade show representatives.

What is the meaning of vendor? ›

A vendor offers goods/services for sale, especially to someone next in the economic chain. A vendor can work, both as a seller (or a supplier) and a manufacturer. The general term used for describing a supplier/seller of goods is called a vendor. Vendors are an essential part of a supply chain.

How do you manage multiple vendors? ›

Here is a step-by-step guide to establishing an efficient multi-vendor governance framework.
  1. Defining the scope of the project. ...
  2. Select the best tech stack and processes within the allocated budget. ...
  3. Engaging providers. ...
  4. Establishing the right KPIs. ...
  5. Roles & responsibility assignment.
29 Feb 2020

How is vendor quality measured? ›

Vendor performance is usually measured by a series of agreed and contractual Key Performance Indicators (KPIs) that are most relevant and suited to the industry. This prevents any obscurity and means that everyone involved knows what's expected from each party.

How do you show vendor performance? ›

Vendor performance management is usually measured by a series of agreed and contractual Key Performance Indicators (KPI's). Most VPM systems use either dashboards or balanced scorecards to measure a vendor's performance. The former provide a 2-D view and balanced scorecards provide a more 3D view.

What is the first step of vendor development process? ›

To begin with, conduct a preliminary review of all your vendors' proposals. The next step would be to state your business requirements and the vendors' requirements. Discuss with your management team and assign an importance value for each requirement. Next, assign a performance value for each requirement.

Which is the first step in creating a vendor? ›

How to create a Vendor
  1. Step 1) Enter Transaction code FK01 in SAP Command Field.
  2. Step 2) In the Initial Screen, Enter.
  3. Step 3) In the next screen, In Address Tab Enter the Following.
  4. Step 4) Next in the Account Control section page Enter the Corporate Group if the Vendor belongs to a corporate group enter the group key.
5 Nov 2022

What is vendor assessment process? ›

Vendor assessment describes an organization's program of assessing its vendors' management of that organization's information, and whether vendors are implementing and maintaining appropriate security controls.

What is vendor management experience? ›

The term vendor management is used when describing the activities included in researching and sourcing vendors, obtaining quotes with pricing, capabilities, turnaround times, and quality of work, negotiating contracts, managing relationships, assigning jobs, evaluating performance, and ensuring payments are made.

Is vendor management a skill? ›

Vendor management skills and responsibilities

IT vendor managers must understand the intricacies of each technology, process, software, or tool outsourced to a third party. But it's also a role that requires strong soft skills to communicate with vendors and to maintain those relationships.

How do you manage vendor changes? ›

Engaging Suppliers in Change Management
  1. Consider how your organization appears to your suppliers.
  2. Establish clear supplier performance targets.
  3. Categorize suppliers.
  4. Establish clear accountability.
  5. Engage suppliers in change management.

What are the skills of a vendor? ›

Below we've compiled a list of the most important skills for a vendor.
15 Essential Vendor Skills For Your Resume And Career
  • Product Knowledge. ...
  • Customer Service. ...
  • Stock Merchandise. ...
  • Purchase Orders. ...
  • End Caps. ...
  • Excellent Guest.

What skills does a vendor manager need? ›

To be successful as a vendor manager, you should be detail-oriented and adept at negotiating vendor contracts. Ultimately, an outstanding vendor manager should be able to multitask effectively as well as demonstrate exceptional analytical, problem-solving, and decision-making skills.

What is vendor management lifecycle? ›

Vendor lifecycle management is defined as the cradle-to-grave approach of managing vendors in a transparent and structured way. Vendor lifecycle management places an organization's vendors at the heart of its procurement process by recognizing their importance and integrating them in the procurement strategy.

What are the 5 steps of contractor supplier management process? ›

A 5-Step Process to Effective Supplier Management
  1. Negotiation. Negotiation is one of the key supplier management objectives. ...
  2. Selection. The second key supplier management objective is selection. ...
  3. Collaboration. ...
  4. Innovation. ...
  5. Evaluation.

What are the 3 stages of vendor selection? ›

In a nutshell it goes like this: A) Define Requirements (What do you expect from the service/product), B) Request for Proposal (Ask potential vendors to respond to your requirements) and finally C) Evaluate Responses and make your choice.

What is the first step within the vendor management process? ›

Supplier qualification is the first step of the vendor management process. It is used to evaluate suppliers and determine if they are capable enough to provide the necessary goods or services to the standards set by the buyer.

What is vendor development process? ›

Vendor Development is a process in which you work with the upstream segment of the supply chain to improve the value of your supply chain. This is the part of Supply Chain management in which you not only managing your internal processes of SC but also try to develop your vendors.

What are the types of vendor? ›

The five types of vendors are manufacturers, wholesalers, retailers, service and maintenance providers and independent vendors and trade show representatives.

What is a vendor checklist? ›

It asks potential vendors to submit general information about their company, a financial review, reputational risk information, evidence of insurance, technical documentation regarding information security, and their policies.

What are the classification of vendor? ›

I prefer to categorize the vendors into four categories: Strategic, Major, Niche and Tactical. Each category receives different focus from the Vendor Management Office. This categorization has helped me to manage a large ecosystem of vendors quite effectively.


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