Vendor management: dealing professionally with suppliers

What do a craft business around the corner and a DAX corporation have in common? Both maintain relationships with vendors, and for both it's essential that these run successfully.

But what exactly are vendors anyway? Why is it important to steer dealings with them strategically and operationally? And what advantages arise from it for companies?

These and further questions we'll clarify in this short introduction to vendor management.

What is vendor management?

To better understand what the concept is about, we'll start with a practical example. Imagine you open a shop for home decoration.

So that your customers don't stand in an empty sales room, you need various goods. You win over a manufacturer of unique lamps from northern Germany. Likewise, you source vases from a glass artist in Austria and rugs from the Orient. Even for administrative tasks you need material, be it the paper roll for receipts or the printer cartridge. The list can be continued at will.

Now your first shop enjoys such great popularity that shortly after you already open branches number 2 and 3. However, not in the same town, but in two further cities.

As if that weren't complex enough, the two new locations of course likewise need a diverse offering. On top of that come expenses for important services like the cleaning of your stores or also the surveillance by a security service.

Now imagine that you call on a different provider for each individual good and each individual service. Would you be able to keep the overview over all activities without further aids?

This is exactly the point at which vendor management comes in. In German, the English word is often equated with supplier management. Actually, however, the concept goes beyond that in practice. As vendors, it includes all those actors who render services for a company. These are, besides the suppliers of goods, also service providers and other outsourcing partners like, for example, management consultants.

Vendor management, VM for short, thus comprises the strategic and operational steering of business relationships and activities of a company with its internal and external suppliers and partners.

Why is there vendor management?

With the example of our decoration shop, one can already sense what the purpose of vendor management consists of.

It becomes even clearer, however, when looking at SMEs or even large companies whose supply chains comprise dozens or even hundreds of partners. So you can form an even better picture:

In an iPhone there are components from over 1000 suppliers from 45 countries. VW relies on more than 40,000 suppliers worldwide for its car manufacturing. The Siemens group even reaches over 90,000 providers.

The organization of and individual relationship to the partners gains ever more significance due to the rising number of suppliers.

In doing so, a company maintains a relationship with each individual one of its internal and external partners. So that this runs successfully, the relationship should be continuously checked, maintained and adapted. An undertaking that becomes ever more complex with a rising number of suppliers. Nevertheless, costs have to be monitored, risks minimized and potentials optimally tapped.

Vendor management helps companies to structure their relationships with suppliers such that they can reach their short- and long-term outsourcing goals. In doing so, the complete process chain is covered. In practice, this approach breaks down into four fundamental areas of responsibility:

Selection of suppliers

Here it's about the goal-oriented development of vendor relationships. This includes, among other things:

• Research of suitable outsourcing partners and their offering, quality as well as capabilities;
• Determination of price information;
• Tendering of suppliers;
• Building a supplier base;
• Contract creation and conclusion.

Regular operation

Subsequently, it has to be ensured that the provision of services by the external partners happens according to the agreements. This includes, among other things:

• Administration of documents and critical information;
• Checking the status of contracts;
• Punctual payment of the suppliers.

Maintenance of supplier relationships

If, over time, new requirements toward the providers arise, then these have to be coordinated and implemented. For example, through:

• Monitoring and optimization of conditions;
• Contract extensions and the negotiations that come with them;
• Application of partnership contracts, discounts, bonuses etc.

Performance control of the external partners

Not least, vendor management requires a regular identification, assessment and implementation of improvement possibilities. This comprises:

• Evaluation of the performance of external partners by means of company-specific standards;
• Assessment of the quality of products and services;
• Exchange of know-how between buyer and supplier.

The range of the steered tasks and responsibilities shows that vendor management is a holistic concept. Instead of, for example, leaving price negotiations to purchasing alone and forwarding contracts to the legal department, one views supplier relationships from beginning to end on the meta level.

This cross-project approach enables organizations to centrally bring together all business-critical information about external partners and make better decisions.

Which IT sourcing strategies exist in VM?

How exactly the vendor management of a company is oriented depends on individual factors like the organization size, the strategy and the goals pursued.

Generally, four typical IT sourcing strategies can be distinguished:

• Single Source – With this strategy, the company relies on a single vendor.
• Duality – Here, vendor sourcing builds on two external partners. This could, for example, be one provider for the strategic orientation and one for the practical implementation.
• Multi Vendor – With multi vendor sourcing, a company maintains relationships with several providers. The most capable or most favorable is chosen for a specific area.
• Smaller Scale – Several providers share the tasks even within the same departments and areas.

In our collaboration with many organizations, we've found that with large transformation projects, the multi vendor approach is generally recommendable. That is, you choose the suitable provider for a certain task or a specific product. With this strategically structured supplier portfolio, you can steer processes in an optimized way, increase efficiency as well as save costs.

What benefit potentials does VM offer me?

Companies can benefit from strategic and operational vendor management in diverse ways:

Active shaping of the supplier landscape

One of the goals of vendor management is to remain capable of acting even with a growing volume of vendors. That succeeds because one's own supplier and partner landscape is strategically structured and reduced to strategically sensible providers. As a result, it additionally becomes easier for you to assign responsibilities and minimize possible risks.

Better comparability

Through the systematic overview of existing providers, the vendor suitable for the company can be identified more easily. The services of individual actors become transparent and can be directly set in relation to other competitors. That additionally creates a solid negotiation basis.

What will processes look like in the future? Which new responsibilities and roles will your employees have to fulfill in the future? How do the actions and tasks of individuals pay into your company strategy? You should elaborate these points with your team with enough lead time already during the changeover phase. After go-live it's too late for that.

Minimize costs

Through the constant checking of supplier relationships, it's ensured that you obtain the best price-performance ratio for your expenses. In addition, targeted bidding competitions can lead to better conditions.

Accelerate processes

Through the systematized administration of providers and service providers, operational business is simplified and accelerated. In addition, external partners can be assessed more easily by suitable products or capabilities. That contributes not only to a smooth collaboration, but also enables the buyer a holistic performance management.

Control over one's own goals

Vendor management includes the continuous checking, monitoring and questioning of supplier relationships. With this steering of the supply chain, companies can efficiently implement elaborated strategies and monitor the pursuit of goal agreements with providers.

Long-term growth

Once a vendor management system is established, a continuous increase of external partners poses fewer challenges for the company. This way, rising purchasing volumes too can be handled without triggering disadvantages or risks as a result. Thanks to the cost savings achieved, further growth is additionally favored.

The introduction of vendor management into a company: the grandega approach

Elaborating an optimal strategy and implementation of vendor management is challenging. Companies have to analyze their own starting situation, define individual needs and derive measures from this.

We're happy to support you in this decisive phase of introduction with our proven approach and thus jointly lay the basis for your sustainable success. The grandega vendor management model is a best practice concept that we've developed in our intensive collaboration with companies of various industries and orders of magnitude.

The model serves you as a holistic basis to position yourself strategically and to tackle the operational implementation. Your company-specific requirements are integrated in the process just as much as our professional expertise.

The grandega approach supports your company in building an individual strategy for your vendor management.

The grandega vendor management model places the phases vendor relationship management, sourcing and contract management at the center and wraps these with the vendor strategy. The continuous further development and optimization (Plan, Do, Check, Act) of the corresponding processes and their systems ensures that vendor management adapts to the changing requirements from the project, but also to changed market conditions, and thus focuses on the overall project goals in the best possible way.
Building on this, the most important activities are listed, with which the comprehensive approach of the vendor management model is complemented.

If you'd like to learn more about our approach to vendor management, feel free to contact us.

In any case, you shouldn't underestimate the significance of good supplier relationships for your long-term company success. The well-known engineer and industrialist Robert Bosch already knew that:

„In contrast to the commercial principle that one can and must plague the supplier in order to buy as cheaply as possible, I used to say: a good supplier is dearer to me than a bad customer.”