When asked about their vendor relationships, many purchasing departments would say, “We treat our vendors well. We stand by our contracts, and we pay them.”
That’s often it. Vendors are a cost to be managed.
But for some companies, vendor relationship management (VRM) is a strategic initiative. It’s not a hit to the bottom line. It’s more like a mantra.
In a State of Flux interview, Jean-Christophe Deville, the general manager of purchasing at Toyota Motor Europe, called their initiatives the “Toyota Way,” taking VRM to a whole new level. They hold executive-level reviews. They invest in R&D shows with vendor partners. They even participate in conferences for their vendors’ own suppliers.
While you don’t have to take VRM to that extreme, strong relationships with vendors can be a major advantage, especially during supply-chain shortages and rising inflation.
To see why, let’s dig a little deeper into vendor relationship management—what it is, why it matters, and how to do it effectively.
What is a vendor vs a supplier?
In its simplest form, a supplier is a business that creates something to sell. It’s at the beginning of the supply chain. A vendor is a business that buys that thing and resells it, often to the final customer. It’s at the end of the supply chain.
But it’s not always that simple.
In the world of e-commerce, suppliers often sell their products directly to customers. In those cases, the supplier is also the vendor.
And that supplier-vendor might also have other vendors. So you can buy a new faucet directly from the manufacturer, or you can pop into your local home improvement store instead.
If you think about digital deliverables like SaaS, the business relationships can look even more complicated.
That’s why today, the two words are often used interchangeably.
Whether someone’s talking about vendor relationship management and VRM or supplier relationship management and SRM, they usually mean the same thing.
What is vendor relationship management?
On one level, VRM is just what it sounds like — managing vendor relationships. But how you approach it depends on how you look at it.
You might see VRM as a financial control system, and that’s true. VRM measures and tracks vendor performance to improve things like cost and reliability.
But you could also see it as a strategic opportunity, and that’s true too. VRM is about building long-term relationships to improve things like innovation, quality, and vendor retention.
In fact, it’s very similar to customer relationship management, or CRM. Short-term tactics to weed out bad debt can go hand-in-hand with long-term strategizing to build customer loyalty.
Or, in this case, vendor loyalty.
Why is vendor relationship management important?
The cost-saving benefits of VRM are easy to see. By tracking vendor metrics, you’ll know which vendors deliver on time, how much they cost, where you can benefit from early payment discounts, and more.
But the less obvious benefits might be even more important. For example:
- Tracking up-time or transaction success rates for digital SaaS vendors can improve everything from customer service to sales
- Building long-term relationships can make sure your business is still a priority when vendors face supply-chain challenges
- Vendors that understand your business can suggest new innovations in their own product line to help streamline your operations
- They can also connect you with new partnerships and new opportunities to expand
The best vendor relationships are true strategic partnerships. It’s hard to put a price tag on that.
What is the process of vendor management?
The process of vendor management lies on the performance side of the equation. It’s about tracking key performance indicators (KPIs).
Some examples include:
- Lead time: days between your order and vendor delivery
- Availability: percentage of your orders filled on time
- Accuracy: percentage of orders that arrive without errors
- Quality: percentage of items delivered that pass inspection
- Pricing: where the vendor lies in the range of competitor pricing
- Service rating: your assessment of the vendor’s customer service
- Responsiveness: the time between any complaints and their satisfactory resolution
You can also create formulas based on these KPIs to calculate things like potential risk or even vendor RoI. What you track will be unique to your organization and business model. Just remember that the vendor management process is only one side of the VRM coin.
The other side is the relationship management process — getting to know your vendors and helping them thrive.
For people who like metrics, numbers can feel easier than the human side of business. Numbers are simpler and more concrete. But they never tell the whole story.
How to manage vendors effectively
The best way to manage vendors effectively is to address both sides of the coin. The process and the people. The metrics side and the human side.
Measure performance. Build relationships. And like anything else in business, keep innovating and trying new things.
To get things moving in the right direction, the tips below can help.
15 ways improve vendor relationship management
1. Pay vendors promptly and reliably
Good vendor relations start with your own good behavior. Honor your vendor contracts, and be timely with your payments.
If you ever need to make a payment late, be transparent. Let your vendor know ahead of time, and be ready to pay any late fees under your contract terms.
2. Use vendor scorecards with KPIs
Once you’ve decided on your key performance indicators, measure and track those vendor performance metrics.
Performance management scorecards can help you identify your best vendors as well as areas that need your attention for risk mitigation.
3. Reward your best vendors
Rewarding your top vendors can start with something as simple as a thank you. Show them that you see what they’re doing for your business and that you appreciate it.
Another great way to build bridges is to give your vendor an excellent review, and consider sending someone in their C-suite a note that includes it. Vendors remember the customers that go out of their way to make a personal connection.
4. Give other vendors the chance to improve
For the vendors that give you cause for concern, consider reaching out to them and giving them a chance to improve. If your business is a significant part of their revenue, they’ll appreciate and remember the chance to address any issues and preserve your business.
5. Negotiate win-win contracts
When you’re in the procurement stage of considering new vendors, remember that everything is negotiable until those vendor contracts are signed.
It can be tempting to control costs by negotiating directly over price, but that negotiation approach sets you against your vendor from day one. And contract management tends to have a long lifecycle. Instead, explore ways to improve the deal on both sides of the table.
6. Treat vendors like an extension of your team
When you’re onboarding a new vendor, introduce them to the team. Treat them like an extension of your own departments and operations as much as you can.
When you treat vendors like outsiders, they’ll feel like outsiders. Find ways to make them feel welcome instead.
Consider digital tools like Zoom meetings and Slack connections for easy, anytime communication. Inviting vendors into your project management software can also give them real-time visibility into your deadlines.
7. Communicate and share your business goals
While there are limits to what you can share, non-disclosure and non-compete agreements, when appropriate, will let you communicate more about what you’re doing and where you’re going as a company.
The more your top vendors know about where you’re headed, the more they can help you get there with products and services that are better tailored to your needs.
8. Invite vendors to your webinars
Do you conduct product tours, demonstrations, or educational webinars? Consider inviting team members from the vendor side to give them a better look at your business and how you serve your customers.
The very act of inviting your vendors helps build those relationships. And those webinars can inspire vendors to introduce you to other companies they know — ones that might form powerful synergies with your own.
9. Involve other stakeholders
When you find exceptional performers among your vendors, sing their praises up the chain of command. Vendors that get positive attention from executives are more likely to put your company first.
That’s important whether a vendor is thinking about introducing you to new partnerships or choosing which deliveries to prioritize during supply-chain slow-downs.
10. Visit your vendors and take a tour
Another great way to improve vendor relations is to visit your vendors’ headquarters or other facilities. Meeting their teams and touring their operations can give you a stronger appreciation for who your vendors are and what they do.
11. Ask your vendors about their business goals
Whether or not you can visit, find ways to get to know each vendor’s business. Talk to them about how they operate and what their goals are for the future.
Maybe you’re familiar with tools that could improve their efficiency and internal systems. Or maybe you know other companies they could partner with to provide better, more integrated solutions for their customers — including you.
12. Follow vendors on social media
Connect with your vendors on social media to follow their news, and be sure to like and re-share anything that is accurate, you agree with and that’s relevant to your audience, especially on business-related platforms like LinkedIn.
It’s a simple way to build stronger connections with your vendors over time.
13. Help your vendors grow through referrals
Nothing means more to a business than new business referrals, especially since word-of-mouth is easily one of the cheapest and most trustworthy ways to grow.
By helping your vendors grow, you’ll further solidify your relationship. At the same time, that growth can fuel new innovations in your vendor’s products and services — innovations that might benefit your own operations.
14. Re-negotiate for bigger win-wins
The more you get to know your vendors over time, the more opportunities you’ll find to improve your contract terms on both sides.
You’ll also understand why certain concessions would be hard for them to make as a company while other things might be easier for them to do. By finding those synergies, you may be able to reduce costs while improving things like quality and reliability.
15. Get scorecards from your vendors too
Finally, ask your vendors to rate you as a customer and to be transparent about your scorecard. If there are things you can do to improve the relationship on your side, making those changes will go a long way toward improving your position in future vendor initiatives.
Finding the right balance in vendor relationship management
One thing is clear — good vendor relationships take time and effort. To free up more time for the people side of vendor relationship management, consider using AP automation software to streamline the process side.
BILL’s business payments platform can help improve vendor relationships by
- Automating biller notifications of things like invoice receipt and payment approval
- Automating the payment of expected bills according to your own rules and workflows
- Streamlining digital approvals so payments don’t get held up during busy times
- Providing a clear to-do list so important invoices don’t fall through the cracks
- And much, much more
Plus, BILL makes it easy to measure vendor KPIs while freeing up more time to get to know your vendors personally, build trust, and maintain long-term loyalty.
To see how BILL can help you improve your vendor relationship management, sign up for a live demo from one of our product specialists.