Vendor Management 101: The Basics « CPO RISING – THE SITE FOR CHIEF PROCUREMENT OFFICERS & LEADERS IN SUPPLY MANAGEMENT

In today’s world where globalization and innovation are critical to competitive survival, chief procurement officers rely on supplier specialization more than ever. Never have suppliers been more consequential and with immediate impact on enterprises’ revenues and customer satisfaction. With spend under management holding steady near 65% over the last few years, CPOs must now leverage greater value from their supply base. Thus, the core of a vendor management strategy is finding the right suppliers with the ability for rapid innovation.

A Changing Supplier Landscape

Vendor management has evolved from the days of vertically integrated supply chains to a global landscape dominated by supply specialization and innovation. A quarter-century ago, industry behemoths could control market share for years or even decades. However, that quickly changed with accessibility to world markets and new supplier entrants focused on innovative processes and products.

Consider a product like the cellphone. The cellular market was led for years by the Motorola flip phone. The company owned a vast amount of market share and utilized cutting-edge technology. Fast-forward to the early 2000s and suddenly Motorola is no longer the only game in town. Competitors using suppliers with emerging technologies chipped away (pun intended) at Motorola’s market share until the pie was nearly gone. It stands as an example of the influence of globalization and how quickly innovation disrupts markets.

Eventually, those atop the mountain will fall and be replaced by new entrants. It is extremely difficult to control market share in the long term. Even Amazon CEO Jeff Bezos admitted as much about the future of Amazon — eventually, it will fail. The high amount of churn in all industries is indicative of the criticality of who your suppliers are and how they are helping to drive innovation. Any enterprise with a supply base resembling one from 2000 missed an immense amount of innovation and supply chain expansion.

With that backdrop, it is clear why vendor management remains an enterprise imperative for CPOs and their procurement departments. When looking at the basics of vendor management, it comes down to three key areas.

Supplier Communication and Collaboration

Communication and collaboration are among the most defining characteristics of a strategic supplier relationship. The CPO and procurement team are not simply managing a supplier contract but integrating that supplier into the product development process. Discussions about raw material usage, design choices, and operational options occur regularly. In some cases, the supplier is brought in-house for deeper strategic planning. Essentially, the vendor management strategy pivots from perceiving the supplier as a cost to a business asset.

However, strategic suppliers should be managed to fair margins where they’re getting the support they need to execute on the innovation the enterprise is leveraging. It is a dividing line. But it’s also part of recognizing the valued relationship that exists as well as a more proactive stance the enterprise is making in the market.

Supplier Information Management

The second vendor management area is information management — a complementary area enabling communication and collaboration. Information management is the tactical aspect of vendor management. Enterprises are utilizing systems to transact with suppliers. Ideally, those systems provide efficiencies when transacting. However, if there are challenges sending/receiving orders or making payments, then too much time is being spent on the friction part of the relationship and not enough on the value side.

Information management should efficiently provide:

What is the order?
When is it shipping?
Did we receive what was ordered?
Does the invoice and payment match?

Information management should be streamlined through automation, enabling the majority of procurement’s energy to focus on the strategic aspects of the supplier relationship.

Supplier Performance Management

The third area is performance management where both efficiency tracking and risk management are critical. Cultivating the supplier relationship is essential, but there must be accountability when errors or inefficiencies occur. Tracking invoicing, shipping times, order accuracy, product defects, and the like is part of managing the supplier relationship. The corrugated shipping boxes could have different dimensions than agreed upon, causing inventory space constraints in the warehouse, for example. Regardless of the issue, it must be communicated with the supplier to solve the problem. Suppliers don’t know what they don’t know.

On a global scale, performance management is also about mitigating risk. The previous three years brought greater awareness to supply chain risk. When collaborating with suppliers across the world, there are a host of potential, unexpected challenges that can occur. Thus, tracking and assessing where suppliers are located, potential risks in the region, previous production disruptions, and alternative sources of supply should all be laid bare. A strategic supplier should be transparent about those risks.

Vendor management has come a long way in the last 25 years. Its importance to the procurement organization and the enterprise hasn’t changed. The stakes are even higher as industries seek market-defining innovation. In response, leverage key technologies that can provide a competitive edge by enabling better communication, higher compliance, and driving superior vendor performance. Procurement must embrace the new paradigm that places the views of suppliers as a source of value and advantage.