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What is vendor onboarding?

What is vendor onboarding?

Working with new vendors is a natural part of expanding your operations.

So, when you find a new vendor, you might want to start doing business with them right away. 

But, no matter how eager you are to submit your first purchase order, you need to ensure they’re a legitimate and reliable organization that can fulfill your requirements.

The best way to avoid hiring unreliable or shady vendors is to create a vendor onboarding process that includes:

  • Due diligence 
  • Evaluations
  • Risk assessments
  • Training
  • Performance reviews 

However, simply having an onboarding process isn’t enough. 

The way you implement your process can mean the difference between constant vendor turnover and building long-lasting relationships with qualified vendors.

In this guide, we’ll outline what an efficient vendor onboarding process looks like and provide you with some best practices for incorporating a new supplier into your company.

Key takeaways

Vendor onboarding includes finding, evaluating, and checking vendors before working with them

Implementing a thorough vendor onboarding process minimizes risks and fosters lasting partnerships

Automate the onboarding process for efficiency and to reduce errors, making vendor integration smoother

What is vendor onboarding?

Vendor onboarding refers to the process of discovering new suppliers, assessing their capabilities, running compliance and risk checks, and integrating them into your systems. 

This is sometimes referred to as the supplier onboarding process, and it’s what ensures your business has the necessary information to evaluate a new vendor, add them to your platform, make orders, and pay them.  

The vendor onboarding process (step-by-step)

Depending on the nature of your business and what industry you operate in, this process can vary.

However, the following are some of the most common steps involved in onboarding a new vendor:

8-step vendor onboarding process
8-step vendor onboarding process

1. Find vendors

The onboarding process starts with the procurement stage as you consider the possible suppliers you could do business with. 

Get a good idea of what your options are by doing some research online, getting recommendations from industry peers, attending trade shows, or using other avenues. 

From these various sources, you can come up with an initial list of potential vendors that you want to consider further. 

2. Evaluate prospects

Next, set some criteria to evaluate your potential suppliers based on your business’s needs. 

Again, this will be unique to each organization, though it’s an important step that helps you narrow down your options and find vendors who are aligned with your business objectives. 

Some of the main points to consider might be:

  • The vendor’s reputation in the industry
  • The quality of goods and services they provide
  • Pricing, and other factors. 
  • How their availability fits with your timeline
  • Any compliance or legal requirements

You can start reaching out to potential vendors at this point to let them know you’re interested in a possible partnership and collect the key pieces of information you need to compare suppliers. 

3. Conduct due diligence

When you narrow down your list of potential suppliers, you need to conduct thorough due diligence to qualify them. 

The questions you ask and the information you collect at this stage are critical to mitigating supplier risks and ensuring you’re only doing business with legitimate vendors. 

According to one survey, 73% of businesses experienced at least one significant disruption caused by a third party within the previous three years, showing how important it is to conduct a thorough risk assessment before working with a new vendor. 

To support your due diligence efforts, you might want to request and verify the following documents and information: 

  • Full legal name
  • Address of the headquarters
  • Website 
  • Articles of Incorporation
  • Ownership structure
  • Business license
  • Tax ID
  • Certificate of Good Standing
  • List of subcontractors

In addition, you may inquire about their financial health, as you don’t want to make yourself reliant on a supplier for key goods or services only for their business to go under months later. 

This is less of a requirement for smaller vendors that are less business-critical.

For instance, you likely don’t need to request a financial health check from a design agency.

But for a company that’s supplying 80% of the products you sell, it might be good to confirm they can keep up with your demand.  

You can also ask them about their practices for adhering to industry standards and compliance requirements, and what their overall legal standing looks like. 

In fact, some estimates show that 26.7% of businesses ask a new supplier whether they’re restricted by international sanctions during onboarding. 

Obtaining references from their past or current customers can provide you with firsthand knowledge about what it’s like to work with the supplier, for better or for worse. 

4. Negotiate a contract

Based on your assessment so far, you likely have a good idea of the potential vendors that meet your requirements and you’d like to proceed with. 

After you’ve received the proper approvals from internal stakeholders, you need to negotiate the contractual terms of the partnership.

This will spell out your expectations and other key factors of the partnership, like: 

  • Pricing
  • Payment terms
  • Delivery schedules
  • Service-level agreements (SLAs)

Negotiating a contract with a new vendor can be a delicate dance because you want to secure favorable terms for your business, but you also want the partnership to be mutually beneficial to the supplier to help build loyalty and trust between your two organizations. 

Try to keep negotiations fair to avoid compromising the relationship and starting off on the wrong foot.

Learn more: How to negotiate with vendors effectively 

5. Exchange the proper information

Once the contract is signed, there may be some remaining pieces of information you need to officially start doing business with them. 

Some of this may have already been provided during the due diligence phase (like legal name, tax ID, address, etc.).

However, any additional information should be exchanged at this time for seamless integration into systems like your accounting software, procurement platform, and enterprise resource planning (ERP) tool. 

This might include contact information for key personnel within each organization and details that support their preferred payment method. 

Plus, you may need to provide the vendor with similar pieces of information so they can set you up in their systems and workflows.

6. Provide necessary training

To start wrapping up the onboarding process, collaborate with the vendor to provide any necessary training to the internal staff who will be interacting with the supplier. 

This might include providing outlined procedures on how to submit a purchase order, use their procurement systems, and any other expectations for the partnership. 

You can do the same for the vendor’s team, ensuring they have the necessary access and information to support smooth transactions. 

7. Monitor performance

As you begin doing business together, you’ll want to monitor specific metrics or KPIs with a vendor scorecard to give your team an objective way to assess the vendor’s performance. 

Some useful KPIs to track include: 

  • Lead time: the number of days between order and delivery
  • Accuracy: the portion of orders from a vendor that don’t contain errors
  • Availability: the percentage of orders that are fulfilled on schedule
  • Quality: the portion of delivered items that pass inspection
  • Responsiveness: the time between raising a complaint and receiving a resolution

Tracking these metrics gives you a way to ensure vendors are meeting the expectations outlined in your contract. 

It also provides you with tangible data that you can bring to their attention if adjustments are needed. 

Here's an example of what a vendor scorecard might look like.

vendor scorecard example

8. Perform ongoing relationship management

Even once the initial steps of the vendor onboarding process are complete, you still need to foster your supplier relationships if you want to create a mutually beneficial arrangement over the long run. 

Managing vendor relationships effectively can provide you with a number of benefits, including better payment terms, priority among their customers, and better quality goods or services. 

All in all, vendor relationships are a collaborative effort and require both organizations to provide open communication, feedback, and a commitment to continuous improvement. 

How to automate the vendor onboarding process

Each of the steps included in the vendor onboarding process is extremely valuable and ensures a smooth transition as you bring on a new supplier. 

But, in many cases, manually collecting all the necessary information and entering it into your system by hand can be a tedious and time-consuming process that’s prone to human error. 

To be more efficient with onboarding and ensure better accuracy, you might consider automating certain steps in this process with a self-service vendor portal, which can provide the following benefits: 

  • Better convenience since both vendors and your accounts payable team can complete onboarding tasks at their own pace
  • Vendors can avoid entering the same pieces of information multiple times with a more streamlined and organized system
  • The guided portal typically makes the entire onboarding process faster and more straightforward
  • Your accounts payable team can save valuable time since they don’t have to manually facilitate each step in the process

Make sure you select the vendor onboarding software that’s best suited to your needs and requirements, including being compatible with your existing systems and built with strong data security measures to safeguard vendor data. 

3 best practices for onboarding new vendors

Creating an efficient and well-defined onboarding process can help your business establish solid vendor relationships. 

This doesn’t always happen overnight and can require some optimization and refinement over time. The following best practices can help you get started:

1. Clearly define your objectives

As you approach the vendor onboarding process, make sure you have a clear idea about what you’re looking for in a supplier and how they will potentially support your overall business goals and objectives. 

What qualities should they have? 

Which compliance requirements do they need to meet? 

What capabilities do they need?

For better clarity on these questions, you may want to speak with different stakeholders and departments within the organization, like accounting, finance, or operations.

Their input can be the foundation for the criteria you establish to evaluate vendors. 

This will also help you determine the amount of effort you’ll need to devote to the onboarding process, in addition to the team’s capacity for handling such duties, and how you might want to split up responsibilities between personnel for smooth execution. 

2. Use checklists to standardize onboarding

It can be helpful to create an onboarding checklist your team can follow each time they want to start working with a new vendor. 

A detailed checklist with the key onboarding steps and pieces of information to collect ensures you’re never missing anything needed to perform due diligence or integrate suppliers into your systems. 

Creating this system makes the onboarding process much more efficient and standardized for all new vendors, no matter which employee is handling it.

3. Automate the process where possible

Automation can be highly valuable when you want to optimize your onboarding process so it’s easier to complete by both your team and the vendor.

Handling each of the steps manually is manageable when you only have a few suppliers.

But, as your business grows and you begin to seek out more vendors, onboarding dozens of new vendors can get complicated and create bottlenecks for your AP team.

By automating certain parts of this process you can free up your time from tedious tasks and focus on more engaging and value-add projects.

Onboarding vendors is just the first step

Your onboarding process is how you set the tone for your strategic partnership with a new vendor.

You only have one chance to make a first impression, so having a process that is streamlined and efficient makes it easier for your team to verify vendors’ information and quickly integrate them into your company.

One crucial part of onboarding is setting up new vendors in your accounting systems so you can pay them.

Using an automated AP solution (like BILL) makes it easier to pay vendors on time. Vendors can simply email a digital invoice or you can quickly upload a paper copy directly to the system where it will start processing automatically. 

If you want to learn more about how we can help you with vendor management, give BILL a try today.

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