Sustainability, once considered a “nice to have,” is now standard practice for most businesses. Procurement is leading the way in promoting sustainable operations and supply chains. Already, major global brands like Bain, Bayer, and Air Liquide, are pledging their commitment to sustainable procurement.

How can you be sure you’re increasing the stability and sustainability of your supply chain? How can you partner with vendors that align with the environmental standards of your brand? 

As we discuss the basics of developing a more sustainable procurement process, you’ll learn:

• What is sustainable procurement?
• The benefits of increasing procurement sustainability
• Why companies are moving toward sustainability
• How one top brand makes sustainability a competitive advantage
• Steps to build a sustainability strategy for your brand

What is sustainable procurement?

Sustainable procurement refers to purchasing goods and services produced using more environmentally responsible sourcing and manufacturing practices. 

Though “sustainable” is a vague term covering many practices, it can be understood as any practice that intends to preserve the natural world, conserve resources, conduct environmental stewardship, and reduce negative environmental and social impacts.

Here are some examples of sustainable actions businesses take:

• Reduction of water use or water pollution
• Use of renewable raw materials and natural resources
• Ensuring human rights and safe working conditions
• Reduction of all sources of greenhouse gas emissions
• Production of lower-carbon and recyclable goods
• Localized production to reduce transportation impacts
• Avoiding the use of toxins (for instance, PFAS and other “forever chemicals”) 

Sustainable procurement requires companies to conduct due diligence and vendors to make their sustainable procurement strategies transparent. The goal is to ensure that chosen suppliers—both your direct vendors and those upstream and downstream in the supply chain—proactively seek ways to minimize waste and reduce carbon footprint.

Operations leaders must follow suit to future-proof their businesses. The best way to do this is to procure goods and services from environmentally conscious suppliers and vendors.

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Benefits of sustainable procurement

Sustainability is about more than appearances. Yes, customers connect with the idea of brands acting as environmental stewards as the average person begins to focus more closely on the conditions we create for future generations and the near-term habitability of the planet.  

Implementing sustainable procurement practices in your organization also has its own internal benefits.

Here are some ways sustainability drives cost savings and value creation: 

Better cost efficiency: As it turns out, saving the planet can also translate to saving cash. Because part of sustainable practices is conservation of resources, sustainable brands generate less waste and therefore save money. Strong ESG credentials drive down costs by 5 to 10 percent as these companies focus on operational efficiency and waste reduction.

Early compliance adoption: As the world warms and governments take notice, legislation will enter the sustainability equation. Get ahead of legislation and implement sustainable practices now (versus awaiting some future mandate). This way, you build a more adaptable business that avoids obstacles as new laws come into play. 

Increased brand reputation: Companies that champion sustainability efforts gain recognition in the market. By becoming proactive about sustainability, brands are more likely to connect with impact-minded consumers. In turn, this extends their market reach and strengthens positive brand association. 

Why sustainable procurement is important

Sustainability drives operational and cost benefits, but brands should remember consumers will opt into your brand (or out) based on your perceived ESG commitment.

Brands take a stand on sustainable products and processes because they know the stakes are high. Consumers and investors want businesses to prioritize sustainability, and they’ll favor those that do.

Research from IBM shows that close to 80% percent of consumers say sustainability is important to them. Of those, 60% percent would even be willing to change their shopping habits to reduce environmental impact. With Gen Z shoppers leading the way in this consumer shift, these numbers will only grow.

Climate change is a reality consumers and corporations can no longer ignore. One hundred- and even 500-year outlier events such as fire, flood, drought, and superstorms occur more frequently, making environmental impacts part of the daily news cycle. 

Consumers literally can’t avoid the conversation on sustainability. Gen Z (who, along with Gen Alpha, will bear the brunt of climate change over the next 50 years) views it as the most important global issue.

Much of the environmental crisis is the result of commodity production. Almost 90% of global deforestation is related to the expansion of agriculture, such as production of key commodities like timber, cattle, palm oil, and soybeans. 

Consumers that make that connection change their behavior—they vote with their wallets. Following last year’s cattle-ranch-related fires, for example, some consumers took a stand by becoming vegetarian. 

These trends will continue as the next generation becomes more aware of the risks commodities and consumer goods production has on the environment. 

Investors care about sustainability, too 

Investors increasingly move their capital to funds related to Environmental, Social, and Governance (ESG) matters to guard against risk—both from disillusioned consumers and from business-continuity issues. If companies don’t respond to these shifts, they put their share price in jeopardy. Companies should take heed or risk sinking their share prices.

ESG assets are set to expand exponentially, rising to $53 trillion dollars by 2025, according to data analysis from Bloomberg. BlackRock even went so far as to say the firm would avoid investing in companies that pose sustainability-related risks.

“I believe we are on the edge of a fundamental reshaping of finance,” Larry Fink, CEO of BlackRock, wrote in an annual letter to chief executives.

Companies have a duty to their shareholders to respond to this shift, and sustainable procurement is one of the most straightforward ways to do that. 

It doesn’t require you to invest years into building wind turbines or reducing your emissions—although these things are also important. You just need to take a strong stand and eliminate suppliers that expose your business to environmental-related risks. After all, guarding against risk is one of procurement's primary objectives.

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Sustainable brands are already winning

The data is in, and it shows that brands prioritizing sustainable procurement will outperform those that don’t. 

ESG investing is already paying off. Higher ESG-rated companies fared better than lower ESG-rated companies when markets tumbled at the start of the COVID-19 crisis, and BlackRock believes this trend will continue. 

In a recent report, the firm said, “We believe companies managed with a focus on sustainability should be better positioned versus their less sustainable peers to weather adverse conditions while still benefiting from positive market environments.”

The evidence from successful companies concurs. One example to consider: Patagonia.

Patagonia is a champion for sustainable initiatives, even encouraging consumers to repair their old gear before purchasing something new. In 2011, their famous ad in the New York Times told customers, “Don’t buy this jacket.” 

The ad was a hit. Patagonia saw a 30% increase in sales.

More recently, the company went so far as to change its entire value proposition. The company website now features, as part of its core values, items like “build the best product” to reduce waste and prolong usability and “cause no unnecessary harm” in the operation of its stores and manufacturing. The brand also strives to “use business to protect nature” by identifying and solving social problems. As Patagonia is a privately held company, exact growth figures related to their corporate social responsibility efforts aren’t publicly available. However, given the positive response on social media, we have to assume their strategy is working. 

Whether you’re a privately owned company with just 100 or so products, or a publicly traded behemoth owning more than 400 brands, sustainable business practices can win for you too.

How to create a sustainable procurement plan

Building sustainability standards for your business is a long-term, thoughtful process. It presents its own unique challenges and requires strong change management. When considering moving to a sustainable procurement strategy, start with these six steps:

1. Identify and align sustainable goals

Knowing the outcomes you’d like to achieve is the first step in crafting sustainable development goals for your organization. There are a few common goals organizations look to achieve when implementing sustainability: 

• Reducing waste in internal manufacturing processes
• Reducing water usage and impact 
• Minimizing carbon footprint or emissions 
• Increasing vendor diversity and equity
• Increasing use of fair market suppliers and products

Take time to interface with the various stakeholders and departments involved in this process, from the executive team and finance department to legal and manufacturing. 

2. Establish sustainability standards

Build a framework to evaluate potential new suppliers and move toward sustainability within your current supply chain. Using the goals identified in step one of this process, create a baseline for your sustainable supply chain. Identify standards across the value chain and commit to incremental improvements toward your end goals. 

Focus on a few standards to look for in new and existing vendors: 

• Carbon emission reduction reports
• Utility and energy consumption
• Waste reduction and recycling targets
• Freight distance and logistics practices 
• Supplier diversity metrics 

3. Assess your current supply chain

Once you have standards in place, take a look at the current state of your supply chain. How many of your vendors (if any) meet the standards you’ve set? Take time to interface with your suppliers. Conduct due diligence into their internal sustainability goals, and use that information to inform future contract decisions and negotiations. Where possible, consolidate vendor lists, which can reduce secondary sources of emissions by ordering from fewer sources.

4. Implement a sustainable procurement policy

With goals and standards in place, put your baseline plan into action. The idea to keep in mind here is “progress over perfection.” Begin with a small-scale deployment. Identify opportunities to improve sustainability as contracts come up for renewal. Add to your plan as your understanding of desired outcomes and objectives improves.

5. Educate stakeholders

Driving sustainable change is a top-down measure. Educate your buyers and other stakeholders on the new practices in place. Be sure to pair your program with a strong procurement process that enables end-to-end visibility in all of your purchases. 

6. Measure and refine

Sustainability requires long-term maintenance to be successful and ensure the continued strength of your sustainability partners. Once your first iteration of the program is in place, commit to regular vendor lifecycle reviews to ensure your vendors meet your sustainability and performance benchmark. Conduct internal audits to ensure your brand is meeting its sustainability goals.

How Order.co supports sustainable procurement

Procurement platforms help create visibility in the procurement process, a key condition to improve sustainability in your purchasing. Using Order.co, companies increase the efficiency of their supply chains and streamline their order process to reduce issues like redundancy and ordering errors. 

Order.co allows buyers to take control of their purchasing process through: 

• Buying from preferred vendors and curated selections 
• Understanding usage trends to make better purchasing decisions
• Reducing waste and unnecessary spending in the procurement process

If you’d like to learn more about driving efficiency in the procurement process, take a look at our free resource, The Operational Efficiency Handbook. It offers even more ideas to increase the efficiency and visibility of your purchasing process.

The misconception about the vendor selection process

Vendor selection is typically thought of as a five- or six-step process that ends with a contract. In reality, the vendor selection process shouldn’t have a definitive end at all.

Businesses change over time — yours will, and so will your vendor’s. It doesn’t make sense to approach vendor selection with a linear mindset and be bound to a contract in perpetuity. In fact, inefficient contracting with suppliers and vendors is responsible for an estimated 17% to 40% in value leakage, according to KPMG.

Businesses that don’t closely manage their vendor relations risk paying more and absorbing inefficiencies. To fix the vendor selection process, make it an ongoing feedback loop based on cost and value.

Download the free tool: Vendor Scorecard Template

Which vendors should you select?

Select the vendor that best aligns with your business

The most cost-effective vendor for your business is often the one that most closely aligns with your needs, goals, and values. Evaluate what these criteria are for your business, and then conduct due diligence to find which vendor is the best fit.

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What is the vendor selection process

Evaluate your business’s needs, goals, and values

The first step to a successful vendor selection process is understanding what your business needs from a vendor to succeed.

Start by determining your budget and considering any compliance restraints your business may face. For example, some businesses are subject to stringent security policies based on their physical location. Order.co client XpresSpa is one such business. Because XpresSpa is based in airport terminals, all shipments the company receives must pass through airport security.

Then consider your long-term goals and how a vendor could inhibit or support them. Does your business have expansion plans, for example? If it does, or you suspect it may eventually, you need to choose a vendor that will be able to scale with your business by providing larger quantities of supplies across geographies.

Finally, think about your business’s values. If your company actively stands for something — like sustainability or female empowerment — you should choose a vendor that does, too. For example, if your business is a staunch advocate for small businesses, it would be hypocritical to purchase exclusively from Amazon. If the media were to learn of and report on this inconsistency in values, your reputation and market value would suffer.

Conduct your due diligence to find the right fit

Once you know what your business needs to succeed, you can ask the right questions throughout your due diligence and weed out any vendors that pose a risk to your business.

To begin your due diligence, set up meetings and demos with vendors of interest. Come to those meetings prepared with questions that relate to your business’s unique needs, goals, and values.

Then ask the vendor for references who can speak to the quality of its services. When you speak to a reference, ask questions like:

• Does the vendor deliver orders on time?
• Are the vendor’s orders correct?
• Will the vendor offer an alternative if an item is out of stock?
• Are the vendor’s products consistent with the expected quality?

You can also find answers to these questions by checking out a vendor’s online reviews or referring to the Better Business Bureau.

Calculate vendor risk

Once you have gathered the information you need, evaluate and mitigate any potential risks to your business with NASA’s risk matrix. In a recent article, Order.co provided a tutorial on how businesses can apply this matrix to vendor risk.

Taking this final step will safeguard your business from data security, reputation, and business continuity risks that commonly arise with third-party vendors.

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Vendor selection as an ongoing process

Regularly review vendors to ensure your business is getting the maximum amount of value at a fair price. To do so, gather employee and customer feedback, conduct annual audits, and reevaluate relationships as needed.

Gather employee and customer feedback

Collect input from your customers and employees to learn how vendors are performing.

If your customers aren’t satisfied with your business’s supplies, they’ll replace you. Make sure your business is meeting their expectations by checking in regularly on product quality.

Customer surveys are a great place to start. Be sure to include questions that relate to your supplies. If you run a cycling studio, for example, ask your students to rate the quality of your bikes, lockers, shower gels, and other products.

One of the easiest ways to conduct customer surveys is by email. If you need help creating an email that won’t get deleted, Vitally has some great tips on how to personalize your mailing and improve your open rates. Formspree is also a good resource if you aren’t sure what to include in your feedback forms.

You can also find out how customers feel about your products on social media and in online reviews. Using the same example, a cycling studio could check its ClassPass reviews or Twitter mentions to learn what students are saying about its equipment and hygienic products.

Employee input is also essential. You want to make sure any vendor your company employs is improving — not hindering — your employees’ performances. If a vendor continuously mixes up orders or is late with deliveries, your employees may be spending copious amounts of time resolving these issues.

Ideally, your employees will already feel empowered to share their feedback with company leaders. Even so, it’s important to directly ask for information about what you want to know. Create surveys or feedback forms the same way you would with customers.

Ask employees to rate the quality of vendors’ products and if they’ve been impacted by late deliveries or customer service lapses. It’s best to make these survey responses anonymous so that employees feel comfortable responding candidly.

Conduct annual vendor audits

Regular reviews will help you gauge how each of your vendors is performing. At least once a year, conduct a formal audit of all of your vendors.

Analyze the employee and customer reviews you gathered throughout the year to determine if a vendor is still meeting your needs and helping your business achieve its goals. You should also check in with similar vendors to see if yours is offering a price and customer experience that is consistent with others in the market.

Reevaluate vendor relationships

If you determine during your vendor audit that a vendor relationship isn’t meeting your expectations, take action. You may just need to renegotiate the terms of your vendor relationship. Or, you may be better off finding a new vendor altogether.

Either way, conduct a formal request for proposal (RFP) that includes your existing vendor and a handful of others your business might like to work with. An RFP is essentially just a formal ask from your company for a few select vendors to bid for your business. You’ll put together a brief on your company’s needs, and vendors will come back with a proposal on how they can meet those needs and at what cost.

Conducting an RFP will give your existing vendor the chance to vie to keep your business, while also extending that opportunity to other qualified companies. If your existing vendor comes out on top, you can continue your relationship under terms that work better for your business.

If another vendor prevails, you’ll have to pause your existing orders and create new ones, which can be a nuisance. Don’t let that derail you from moving on to another vendor that will deliver greater value to your business in the long-term.

Keep costs low and value high

A continuous vendor selection process will ensure your business is maximizing the value it derives from vendor products and services.

Order.co's strategic sourcing makes it easy to evaluate vendors on an ongoing basis. We work with each customer to fix its vendor selection process by routinely identifying strategic savings opportunities.

To learn more, schedule a demo with a member of our sales team.

At Order.co, we think it’s particularly useful for businesses to implement a vendor management policy. A vendor management policy evaluates and controls business risk. It requires businesses to determine approximately how much risk they are willing to assume when working with a vendor. 

But risk in an organization is a broad concept. How can companies think about risk in tangible terms? As it turns out, the solution comes from an unlikely source. 

According to Ness Labs, NASA has an ideal way for businesses to evaluate risk. In a recent article, “Managing risk with the NASA Risk Matrix,” Ness Labs outlined the approach that NASA scientists use to assess and mitigate risk in their business.

For an organization that deals with literal rocket science, NASA’s Risk Matrix is surprisingly simple and relatable. Once you understand the general principle, the Risk Matrix can help your business quantify the risk of working with a vendor and make smarter decisions about who (or who not) to work with.

Download the free tool: Vendor Scorecard Template

What is NASA’s risk matrix?

A large part of science and space research hinges on the ability to conceptualize, navigate, and mitigate risk. Therefore, the scientists and researchers at NASA developed the Risk Matrix as a straightforward graphic to help their teams simplify and conceptualize risk.

The graph measures risk on two scales: likelihood and consequence.

*Source: Managing risk with the NASA Risk Matrix, Ness Labs,

Once you have identified a potential risk, ask two questions: How likely is it that the risk will occur, and how impactful are the consequences?

The Risk Matrix’s logic isn’t specific to NASA as an organization. It can be used by anyone evaluating risk.

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What’s at risk when working with vendors?

Working with vendors exposes your business to many risks, which is why implementing a vendor management policy is so important. Business continuity, reputation, and data security are the most significant risks.

As we go through these three major forms of risk, we’ll also discuss vendor risk assessments. 

When developing a risk management plan for third-party vendors, it’s helpful to have a clear view of the specific risks that may come into play.

A third-party risk assessment questionnaire can help organizations evaluate the risks inherent in outsourcing to a third party. While individual questionnaires should tailor themselves to the organization, the questions below can help you start building a security or supplier risk questionnaire.

Business Continuity

Eighty-seven percent of firms “have experienced an incident with a third party that disrupted their operations,” according to research from Deloitte. Vendor issues such as late deliveries and incorrect orders put your business operations at risk, resulting in unexpected fees or revenue loss.

For example, if you operate a hair salon and your shampoo delivery is delayed, you may have to purchase a replacement product. That product may come at a higher price, resulting in additional, unexpected fees. If you also miss out on retail sales of the delayed shampoo, you’ll incur a revenue loss while the product remains unavailable for sale.

Loss of business continuity can significantly affect your business and its revenue streams. Evaluating the likelihood and consequences of such a continuity gap is important when considering new or untested vendors. 

Business continuity risk assessment questionnaire:

• Does your organization carry all required insurance binders? What are the coverage amounts for claims?
• In the event of a critical shipping delay or supply chain issue, what contingency plans does your organization have in place to mitigate business impacts?
• Has a client of yours suffered a business continuity incident or serious delay in receipt of goods?
• In the event of a supply chain issue or delay, what is your communication policy for clients? 

Reputation

Reputation is an increasingly important metric for consumers considering a purchase. In fact, 60% of consumers reported that bad reviews have dissuaded them from purchasing from a particular business. Businesses must carefully evaluate the risks of partnering with any outside organization when the stakes are so high.

If your business partners with a vendor that does not share your values or engages in illicit business practices, the media—and consumers—may hold your business accountable.

For example, let’s say one of your vendors is caught importing products illegally. Whether or not your business had anything to do with it, you risk getting tied up in a public-relations nightmare. If the media reports your business as receiving the illegally imported product, you could face permanent damage to your reputation.

Due diligence with new vendors is a vital component of third-party risk management. Take the time to understand a potential partner’s business practices and values to reduce the chance of issues in the future.

Reputational risk assessment questionnaire:

• Do you clearly state policies regarding acceptable corporate practices, materials and product quality standards, vendor selection, and legal/regulatory compliance? 
• In the last 12 months, have you had any incidents investigated by a local, state, or federal body?
  • If so, what were the outcomes of such investigations? 
• Do you have a documented environmental, social, and governance (ESG) policy regarding environmental and social impacts? 
• Do you document your ESG data and any environmental issues connected to your product or service? 
• Has there been any past or current litigation concerning company practices? 

Data Security

Data security may be one of the most significant risks a business faces today. Working with a vendor amplifies this risk, especially in the IT space. In fact, 83% of organizations surveyed by Deloitte in 2020 “experienced an incident at one of their third-party suppliers/partners in 2019.”

According to a new report from IBM Security, the expense of these breaches is immense, costing an average of $4.43 million in 2022. What’s more, 19% of these data breaches resulted from the compromise of a business partner among third parties.

Keep in mind, though, that a breach is a worst-case scenario. Failure to comply with laws that prevent breaches is a risk in itself. Depending on location, businesses must adhere to data-security laws from governing bodies such as the Federal Trade Commission and the European Union. Noncompliance can result in hefty fines.

These laws are often complex, covering both data privacy and security. According to Auth0, a company that provides authentication services for applications, “Even if your data collection policies are strictly in accordance with the law, if you’re not protecting that data with adequate security measures such as authentication and access management, you still may not be in legal compliance.”

With risks and the cost of risks running so high, businesses need to pay close attention to the security policies of their vendors.

Data security risk assessment questionnaire:

• Does your organization have a documented data and cybersecurity policy?
• What policies do you have in place to eliminate compliance risk?
• Do you have documented acceptable-use policies regarding company assets and customer data? 
• What security protocols (if any) does your organization use for ensuring data security?
• In the last [X] months, has your organization experienced security breaches, data breaches, or other security risks?
  • If so, what remediation steps have you taken?
  • If so, what was the breach's cause, outcome, and recovery process? 
• What service level agreements (SLAs) are in place for information security?
• Has your organization identified any vulnerabilities with its or a sub-vendor’s systems?
  • If so, how were these identified and handled?

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How can NASA’s Risk Matrix help?

NASA’s framework allows you to define, score, and mitigate risk. These are the three essential components of a vendor management process.

Define risk

NASA uses the following formula to define a risk before applying the matrix, according to Ness Labs:

Given that [CONDITION], there is a possibility of [DEPARTURE] adversely impacting [ASSET], thereby leading to [CONSEQUENCE].

What does that look like in practice?

Let’s say you work for a specialty bakery that produces only gluten-free pastries. You need specific ingredients, such as almond flour, to make your pastries. Your business relies on a vendor to deliver these goods every three days. 

A delay of even one or two days can jeopardize your ability to produce enough gluten-free goods to meet your customers’ demands. A week's delay could completely shut down several days’ worth of operations.

During a vendor audit, you discover another vendor offers similar gluten-free baking products at a lower price. Although the new vendor comes highly recommended, there’s a catch: The vendor ships its products from California, and your bakery and current vendor are both located on the East Coast. That means your orders will have to travel an additional 2,000 miles, increasing the likelihood of delays.

Following NASA’s framework, we can define the risk of ordering from the California vendor as follows:

Given that the vendor is located 2,000 miles across the country, there is a possibility of shipping delays adversely impacting our stock of almond flour, thereby leading to our inability to produce gluten-free pastries, meet customer demand, and turn a profit for up to three days.

Score risk

Now, you need to score a vendor’s riskiness according to NASA’s Risk Matrix. We’ll use it to identify, on a scale of 1 to 5, how likely an event will be and how consequential it might be. 

Using the example above, the likelihood of a delay in our shipment of almond flour is high, given that the vendor is 2,000 miles away. We’ll rate it 5. 

And the consequence that we could lose up to three days of profit isn’t great, but it probably won’t sink the business. Let’s give it a 3. 

Mapped out on NASA’s Risk Matrix, they intersect on a point that indicates a level of “highest risk.” Therefore, we should reconsider working with them.

*Source: Managing risk with the NASA Risk Matrix, Ness Labs

Mitigate risk

After using the Risk Matrix to create a risk score, use that score to decide how to mitigate risk. Your business must establish controls for each level of risk across business continuity, reputation, data security, and other potential issues. 

For business-continuity issues, controls could include the following:

• Keep an extra day’s worth of supplies in stock at all times.
• Establish a backup plan to acquire supplies if there is a delay.
• Limit reliance on any one vendor by ordering half of your supplies from another vendor.
• Limit orders from your vendor to nonessential items.
• Prohibit use of the vendor.

In our bakery example, a level 5 risk means that we should prohibit use of the California vendor, even though their products are less expensive. The risk of disrupting business continuity is too high.

Vendor risk assessment best practices

It’s impossible to eliminate every aspect of vendor risk, but adhering to a few best practices can greatly reduce the likelihood of risk within your organization.

Consider the following best practices when developing a risk management policy for your company: 

Consolidate your vendor list: Prioritize your active vendors to a short, well-managed list of service providers. Consolidating your vendor list allows you to conduct a more robust vendor assessment of potential vendors. It also creates closer working relationships with the vendors you frequently use. This mitigates financial and operational risk.

Use a vendor risk questionnaire: Part of vendor due diligence is obtaining self-reported data from potential vendors. When possible, propose a vendor risk questionnaire to understand the company’s risk and mitigation policies. Additionally, look for any security gaps that could introduce high-risk vendor practices.

Commit to vendor performance reviews: The task of evaluating your chosen vendor doesn’t end once the ink is dry. By conducting regular vendor performance assessments as part of the vendor lifecycle, you can ensure vendors maintain a high level of security and compliance in their internal and external activities. 

Track vendor performance metrics: Understanding the performance of your vendor risk management policy becomes easier when you outline and implement vendor performance KPIs. Monitoring these metrics keeps compliance and vendor performance levels strong. Ultimately, it improves vendor relationships. 

Insist on strong SLAs in contracts: Service level agreements (SLAs) outline the steps a vendor will take to maintain a certain level of performance. They spell out the consequences and procedures that come into play when a compliance issue arises. SLAs should ensure strict uptime, disaster recovery, and data handling or deletion requirements are outlined and followed during and after the contract term (depending on the SLA in question). 

Develop a vendor management policy that eradicates risk

If your business takes a scientific approach to evaluating risk, developing and articulating a vendor management policy should be a straightforward process. A vendor risk management program should consider any areas identified as potentially elevated risks for your company. 

Even so, conducting this process for every vendor you work with takes time.
Order.co can save you the hassle. Order.co’s product catalog gives you control over the vendors your team can purchase from to reduce risk, and Order.co’s network includes 15,000+ vetted, reliable vendors that you can trust. Request a demo today to learn more.

It’s tempting to choose the cheapest vendor without considering the outcome. But race-to-the-bottom decision-making can have unintended consequences.

Nearly half (46%) of firms surveyed in Deloitte’s 2020 Extended Enterprise Risk Management (EERM) Third-party risk management (TPRM) global survey believe that “the financial impact of a failure by a third party or subcontractor has at least doubled over the last five years, with a tenfold increase for one in five.”

This potential for breaks in business continuity (and associated costs) is higher than ever. In addition to losses incurred from the vendor disruption, the firms involved likely pay hefty legal, security, and public-relations fees to mitigate damage.

Businesses can prevent third-party risks and reduce long-term spending by conducting a vendor analysis that focuses on quality—first and foremost. Ask the following five questions during vendor selection to ensure vendors meet your standards for quality.

Download the free tool: Vendor Risk Management Checklist

1. Will the vendor pass a compliance screening?

Third-party fraud is a real risk, and the costs of associating with a vendor that conducts an illegitimate operation can be immense.

Forty-seven percent of the companies surveyed in PwC’s Global Economic Crime and Fraud Survey 2020 said they had experienced fraud in the last two years. Moreover, the cost of these incidents amounted to a whopping $42 billion. These metrics underscore the importance of proactive third-party risk assessment. 

A vendor analysis should always determine whether a current or new vendor complies with the law and engages in ethical business practices. One reliable method of determining vendor risk is to require a completed vendor questionnaire from new suppliers. 

It’s not safe to assume that potential vendors have been vetted for ethical standards because they sell products on a major e-commerce platform. In a 2020 SEC filing, Amazon said it was “unable to prevent sellers in [its] stores or through other stores from selling unlawful, counterfeit, pirated, or stolen goods,” The Wall Street Journal reported. Most e-commerce platforms behave as just that: a platform. It’s on you, as the buyer, to conduct due diligence.

2. Does the vendor share my business’s values?

Vendor relationships with companies that do not share your values pose a risk to your reputation. Avoid public-relations fees and damage to your brand by prioritizing brand values during vendor analysis.

Think about what your brand actively stands for. For example, if your brand is committed to the environment, pay attention to the vendor’s policies around sustainability. Ask about how products are sourced, stored, packaged, and delivered to ensure they meet your brand standards.

The media frequently calls out major brands for engaging in cost-cutting behavior that deviates from their stated values. Nike, for example, was exposed last year for denying payment to sponsored runners when they became pregnant, while simultaneously championing women’s sports in a series of ads. The backlash that followed these revelations convinced Nike to change its policies, but it lost some customers for life.

Don’t end up in the same place as Nike. Partner exclusively with brands whose leadership and stakeholders meet your business needs and share your values.

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3. Can the vendor scale with my business?

Long-term financial strength relies on scalability. As a best practice, companies should source all products considered essential to brand identity through a vendor who can scale with the business. Make sure your vendor analysis considers business continuity not just today, but as you grow.

Say, for example, you run a Pilates studio. Your first location is a smashing success, so you replicate this business model and open three more. And then another five. But when you try to create an order for the necessary equipment at the third wave of locations, you learn it isn’t possible. Your vendor can’t support the size of your custom order. Reluctantly, you purchase different equipment from the vendor. However, when it arrives, it isn’t up to the same standard of quality your customers have learned to expect. Disappointed by the changes, your customers fall out of the loyalty loop and begin experimenting with other studios.

The right vendor should be able to support larger quantities of your order if/when your business grows. If it can’t, your ability to offer a consistent customer experience across locations is at risk. In addition, inconsistencies are harmful to your brand roadmap and cost you revenue if they result in diminished customer trust.

4. How will the vendor source my product if there is a disruption to its supply chain?

An out-of-stock item can range from a nuisance to a significant blow to business continuity. Vendors source their products from a wide range of suppliers, who, in turn, have suppliers of their own. During your vendor analysis, ask each vendor about their contingency plans for supply chain management issues to avoid surprises if/when you begin working together. 

The potential for business disruption is immense, especially for manufacturers located in high-risk geographies. Fortunately, many vendors are large enough that they can offer a similar product if yours goes out of stock. 

First, however, you’ll want to know which product they are likely to replace your usual order with. Then, what key differences exist between the two products, and whether there will be additional charges for the swap.

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Vendor Risk Management Checklist

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5. Does the vendor provide a high-quality experience?

A vendor that gets your order wrong, or can’t guarantee timely delivery, will end up costing your business.

Let’s say your spa relies on bulk procurement of cleaning products and hand sanitizer. Unfortunately, the delivery arrives a few days late, so you ask your receptionist to pick up some cleaning solution from the pharmacy before his shift. Not only do you now have to make an ad hoc purchase with considerable markups, but you also need to pay your receptionist for their time and process their expense report.

Issues like this do occasionally arise. Life—and weather—get in the way of what we plan, and we have to be adaptable. But what happens if this becomes a recurring issue? And what if, when the delivery does arrive, the order is incorrect? Now your receptionist has to run to the pharmacy and return a package, but your business still hasn’t received its cleaning supplies.

Avoid situations like this by asking the vendor for references who can attest to the quality of the vendor’s services. You can also check out online reviews and scorecard reports on sites like Better Business Bureau. During your vendor evaluation, pay attention to reviewers who comment on the accuracy and timeliness of orders, the quality of products, and the willingness of the vendor’s customer service team to resolve issues quickly. 

Vendor analysis shouldn’t end with a contract

Vendor analysis is one of your most critical business processes. Your supplier lifecycle analysis should feature annual audits to ensure that current vendors remain cost effective. Determine the expected versus the actual costs of a vendor during these audits, adding in any additional fees incurred from using the vendor’s services. 

Examine whether the vendor still meets all relevant use cases and scenarios. You should also assess whether your or the vendor’s values have changed and whether the vendor still meets your compliance standards.

Order.co’s network of more than 3,000 vendors makes ongoing vendor management easy. We work with each customer to identify strategic savings opportunities, improve vendor performance, implement time-saving automation, and ensure that your supply chain is never disrupted. To learn more, schedule a demo with a member of our sales team.

The thought of choosing a vendor management system might make your skin crawl. When would you even find the time? But like most finance and operations professionals, you know if you don’t do it now, you’ll be wishing you did as your department gets busier.

A vendor management system (VMS) can profoundly impact your business and its day-to-day operations. This solution centralizes purchasing, budgeting, vendor selection, delivery tracking, invoicing, and reporting. Managing these processes is time intensive and costly, which explains why more than half of companies are currently focusing on digital transformation as a top priority.

But how do you choose the right VMS: one within the budget that will address your unique day-to-day challenges? 

It isn’t complicated if you are pragmatic in your approach. To help, we’ve created the following roadmap, with an overview of the key features you’ll want in your VMS automation software. Let’s take a look.

What is a vendor management system (VMS)?

A vendor management system is a cloud-based software tool that helps organizations track and manage the supplier relationships that keep their businesses moving forward. A vendor management system centralizes data for each of the suppliers or service vendors a company works with. Common data stored within a VMS includes the following:

• Supplier contact information
• Supplier payment details and terms
• Copies of vendor agreements
• Standard purchase price data
• Historical purchase requisitions or purchase orders
• Vendor invoice images and due dates
• Payment confirmations
• Vendor lifecycle evaluation data
• Supplier performance evaluations
• Notes and supporting documentation

Why are vendor management systems important?

Organizations conduct business with a growing number of external vendors. Managing dozens or hundreds of vendor relationships manually can lead to costly and time-consuming issues with ordering, compliance, and payment.

Implementing a software solution for managing and centralizing your vendor data reduces or eliminates these issues. 

By using a vendor management system to track supplier agreements and relationships, organizations can reap substantial benefits:

• Reducing spending on materials, goods, and services
• Consolidating suppliers into a preferred program
• Tracking reorder and renewal information
• Improving supplier compliance rates
• Streamlining the procurement strategy and process
• Automating the accounts payable (AP) process
• Improving decision-making through better data visibility 

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Choose the Right Procurement Technology With This Decision Matrix

There are A LOT of procurement softwares out there. Make sure you're choosing the right one for your business.

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How vendor management systems save money

Though it may seem contradictory, investing in the right vendor management system can result in net savings for your organization. It can reduce your bottom line, eliminate discrepancies due to human error, and free up your team from manual processes. All of these have the potential to reduce the overhead costs associated with AP department administration, invoice processing, and data entry. With automation, there are many ways to save:

• Reducing the cost to process an invoice by up to 80%
• Increasing invoice processing flow from tens to thousands per day
• Eliminating costly and time-wasting invoice exceptions
• Taking advantage of early payment discounts for timely payments
• Reducing financial liabilities from third-party risk

All this being said, it’s essential to choose the best VMS solution for your business and its unique needs. Let’s look at the features that make a vendor management system useful. What features should a vendor management system have?

Steps to choosing a vendor management system

The process for selecting a vendor management system should be thorough and carefully considered. It should address any pain points your business currently experiences and offer solutions for improving your vendor management processes.

Establish goals for the system

It may sound obvious, but the first step to choosing a vendor management system is understanding why you need one. If you identify the pain points you want to solve before you kick off your search, you’ll bring direction to your research, which will enable you to measure each solution by its ability to meet your specific objectives. Think about this in both the short and the long term.

Ask yourself some questions: 

• How much accounts payable automation (if any) do we currently use?
• What are the most pressing problems with our current vendor management and accounting system? 
• How often does the accounts payable department deal with issues like invoice exceptions, late payments, double-entry issues, or late fees?
• Has the team encountered wide-scale issues such as fraudulent invoices or missing invoice payments?

Based on the above information, you may determine some short-term or long-term goals for your procurement function.

Assess your current system

Once you determine what you need most, look at what you have currently in place. Understanding how AP automation will fit into the larger tech stack and approval process can help guide decision-making. 

If your organization has existing systems in place (either manual or automated), ask the following:

• Do we currently have a procure-to-pay system in place, and is it fit for service according to our current operations?
• What internal controls or workflow options are currently in place for things like invoice approval, three-way matching, vendor payments processing, etc.? 
• How do we currently access, edit, and use invoice data? What data formats do we need to incorporate?

Examine integration potential

The vendor management system you select should be compatible with your existing tech stack without jeopardizing your company’s data. Consult with your IT and compliance teams to ensure that the solutions you’re considering work well with the technology you already use and that you can trust each one to protect your data.

1. Start by setting up a quick call with someone on your IT team. Let them know you are considering a few software solutions, and ask whether there are any questions you should ask vendors about application programming interfaces (APIs). Your IT team may have documented requirements or supplier questionnaires available to use.

2. Then, reach out to your compliance department as part of the interdepartmental approval process. They can help you evaluate whether vendors are housing company data safely. They may even have established criteria that all vendors must meet.

3. Based on this information, identify at least three suppliers or AP automation solutions that may fit your current business processes and meet your future goals. Look for a solution that offers a flexible and intuitive platform, a high level of security for sensitive data like financial statements and payment processing, and plenty of integration options.

Prepare for VMS product demos

Once you’ve identified the vendors you want to consider, set up a demo with each. During these demos, control the narrative by focusing on what you need from a vendor management system to succeed.

Before the demo, prepare a list of questions you’ll need answered in order to feel confident enough to make a decision. Have a sense of your budget and estimate how much you hope to save by investing in vendor management software. You can also ask a member of your IT team to join the demo if it makes you feel more confident.

At the beginning of the demo, remind the sales representative of your pain points and goals. This will help ensure that he or she focuses on your unique needs, and it will set up the conversation to address your specific questions.

Ebook

Choose the Right Procurement Technology With This Decision Matrix

There are A LOT of procurement softwares out there. Make sure you're choosing the right one for your business.

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Evaluate vendor management systems with a scorecard

Once you have evaluated the product offering for each shortlisted supplier, you should be close to a decision. If you have difficulty choosing between two closely matched options, consider using a decision matrix to clarify your needs and advance to a final decision. 

The following matrix covers key decision criteria for a vendor management solution. To use the matrix, answer each question on the left on a scale of 1 to 5 and note it in the column on the right. Tally up your responses for a final score. Do this for each vendor, and then select the vendor with the highest score.

Feel confident about your VMS decision

By taking the time to evaluate and select the right vendor management system, you can arrive at a decision and implement it with confidence. 

Order.co brings together the best features of a vendor management system in an intuitive platform. It works with enterprise resource planning (ERP), finance, and accounting solutions to provide total visibility into your financial life. It offers full automation of the AP process and flexibility to serve your business across all locations and applications. With Order.co, your purchasing department can shed the busywork and build stronger supplier relationships with ease. 

To see how Order.co could fit within your organization, schedule a demo.