How Better Vendor Management Reduces Procurement Cost & Risk
How Better Vendor Management Reduces Procurement Cost & Risk
The internet and cloud services have given organizations access to a world of supplier options. What hasn’t gotten easier? Sifting through potential vendors to get the best prices and contract terms for your business needs.
With so many choices, it can be difficult to maintain clear oversight of each supplier relationship and service provider contract. Strong vendor management practices bring clarity to these interactions, helping ensure long-term success for both parties.
This article provides an overview of good vendor management practices and details the benefits of improving supplier management. Learn how taking a proactive approach impacts supplier performance, leading to enhanced productivity, increased savings, and faster growth.
Download the free tool: Vendor Scorecard Template
What is vendor management?
Vendor management is the process of controlling costs, driving business objectives, and mitigating risk through routine review and strong relationships with vendors. Managing the vendor lifecycle includes selecting the right vendors using established internal requirements, negotiating contracts, evaluating performance, and ensuring agreements deliver mutual value.
Why vendor management is critical for growing businesses
As a company grows, a vendor management system becomes increasingly important. Scaling procurement functions as the volume of orders and number of vendors increases can improve business processes, cost efficiency, risk assessment, and compliance adherence.
For operations and procurement professionals, the challenges of juggling dozens of vendors are all too familiar. Without a strong vendor management program, organizations may face:
- Inflated costs due to lack of competitive pricing or poor discount terms
- Compliance issues if vendors fail to meet industry regulations
- Miscommunications and errors that disrupt orders or delay services
- Missed savings and negotiation opportunities due to limited visibility into performance
- Increased third-party risk from insufficient due diligence or gaps in supplier onboarding/offboarding processes
Effective vendor management mitigates potential risks, helping organizations maintain productive, compliant vendor relationships that scale with growth and support long-term success.
The 5 building blocks of an effective vendor management process
Taking control of your vendor management strategy leads to a better procurement process overall. Strong management rests on five key building blocks: supplier selection, contract negotiation, performance evaluation, vendor relationship management, and vendor risk management.
These critical aspects work in concert to streamline operations, enhance efficiency, and safeguard company interests.
1. Choose the right vendors
Choosing the right vendors can improve operational efficiency, spend management, and risk mitigation, creating a scalable and sustainable path to growth. Strong vendor selection promotes long-term success by helping buyers establish a reliable, high-performing supply chain. With trusted partners in place, you gain access to collaborative agreements that enhance performance and support compliance.
2. Set the stage early
Establishing strong negotiation and vendor onboarding processes early on helps you align expectations and secure favorable contract terms, setting the stage for beneficial long-term partnerships. Clear onboarding and contract policies promote mutual understanding, prevent miscommunications, and ensure smooth operations throughout relationships.
3. Track what matters
Tracking the right key performance indicators (KPIs) enables precise measurement of efficiency, cost savings, and supplier performance—providing procurement teams with useful insights. Ongoing performance monitoring helps teams assess compliance, maintain quality, and optimize service, fostering accountability and encouraging a proactive approach to managing business interests and relationships.
4. Mitigate risk before it hurts
A comprehensive risk mitigation program helps you identify and address potential issues before they disrupt operations. By proactively managing third-party risk, you can avoid costly problems, reduce procurement delays, and ensure vendors remain competitive on quality and service.
5. Build long-term partnerships
Strategic long-term partnerships offer advantages beyond those of a transactional approach, unlocking discounts and building rapport for smoother negotiations. Fostering relationships with a streamlined list of high-quality vendors leads to greater consistency, improved service, and more favorable pricing. Ongoing collaboration also boosts efficiency and enables both parties to adapt to changing market conditions. These efforts reduce risks associated with supply chain disruptions and support mutual success over time, resulting in longer-term contractual partnerships with vendors you know and trust.pport mutual success over time, resulting in longer-term contractual partnerships with vendors you know and trust.
Vendor Scorecard Template
Download our free vendor scorecard to make objectively evaluating vendors easier.
Real benefits of getting vendor relationship management right
Vendor agreements are fertile ground for delivering the benefits of better procurement. When you take a proactive approach to managing vendor relationships, you stand to unlock the following benefits:
- Increased savings: Improving vendor management reduces costs by streamlining your vendor pool to a shortlist of high-performing vendors, unlocking efficiency and enabling cash discounts. By engaging with a smaller list of suppliers, businesses can negotiate better terms and minimize waste. With nearly three-quarters of CPOs prioritizing savings as their primary objective, applying vendor management practices is a great way to contribute to a better bottom line.
- Faster growth: Optimized supplier management fuels growth by ensuring quick access to essential goods and services at the right price. With fewer hidden costs and more efficient supply chains, businesses can scale operations and reinvest savings into further growth.
- Stronger vendor relationships: Building strong partnerships with reliable suppliers creates trust and enables collaboration. Clear communication, timely payments, and consistent interactions improve relationships, resulting in better service, priority support, and competitive pricing.
- Shorter procurement cycles: Establishing efficient relationships with vendors helps shorten procurement cycle times by eliminating bottlenecks and time-consuming manual tasks. Faster order processing and delivery ensures resources are available when needed, helping businesses adapt quickly to market changes.
- Fewer errors: Reducing vendor pools and associated paperwork (such as purchase orders and invoices) also reduces errors in data entry, order processing, and billing. Fewer mistakes mean preventing costly rework, disputes, and supply chain disruptions, freeing up time to focus on performance and strategy.
- Less firefighting: Proactive procurement management means spending less time on last-minute emergencies and more on achieving business goals. An efficient system reduces stress, streamlines operations, and prepares you to tackle future challenges with confidence.
- Enhanced productivity: Focusing on a small group of high-performing vendors lets employees skip busywork and concentrate on more valuable activities like strategic planning and vendor management. With streamlined workflows that require less manual effort, your team will have more time to drive success.
7 Common mistakes that sabotage vendor relationships
Vendor management is a multi-faceted process that grows as a company does. Buyers often trip on the same few stumbling blocks, which can strain partnerships or derail procurement goals.
The following issues commonly do the most damage to efficient and collaborative procurement:
- Lack of communication: Failing to maintain open, consistent dialogue with vendors can lead to misunderstandings and missed opportunities for improvement.
- No shared source of truth: Operating without a centralized system or database where agreements, orders, and communications are stored and accessible can reduce communication and data-informed decision-making.
- Unclear expectations: Not defining or communicating expectations clearly at the outset of the relationship can result in dissatisfaction and disputes over deliverables.
- Delayed payments: Late payments may strain relationships, erode trust, and result in less favorable terms in the future.
- Ignoring feedback: Not seeking or addressing feedback from vendors can prevent the development of more efficient, effective partnerships.
- Inadequate contract management: Failing to properly manage vendor contracts, including overlooking renewal dates or terms adjustments, can create gaps in service and legal vulnerabilities.
- Overreliance on single vendors: Depending too much on one vendor increases risk and may put excessive pressure on the relationship, especially if demands become unreasonable or unsustainable.
Vendor Scorecard Template
Download our free vendor scorecard to make objectively evaluating vendors easier.
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6 Best practices to level up vendor management
Adopting best practices in vendor management helps ensure clear expectations, more accurate data, and fewer issues. Use these steps to build a more secure framework for managing vendors and procurement.
1. Start with clear goals
Setting defined goals for vendor management ensures efforts align with intended outcomes. Begin by defining standards for vendor selection, including security parameters and contract compliance minimums. Then, outline broader goals like cost savings, innovation, reliability, or speed. Clear goals serve as the foundation for productive relationships and strategic decision-making.
2. Let tech do some of the work for you
Leverage platforms that automate contract management, monitor performance metrics, and facilitate communication. These tools not only save time but also improve accuracy and accountability. With automation in place, you can focus more on strategy and building strong vendor relationships.
3. Be a partner, not just a client
Transitioning from transactional supplier relationships into collaborative partnerships encourages trust and mutual benefit. Better partnerships can lead to more favorable terms and flexibility during challenges, creating a competitive advantage.
4. Standardize communication channels
Good communication is the basis of strong partnerships. Consistent, centralized communication reduces misunderstandings, shortens response times, and improves overall efficiency. Vendor management software solutions like Order.co streamline interactions between buyers and suppliers using features for order processing, payments, and contract compliance.
5. Revisit KPIs regularly
KPIs provide quantifiable insights into procurement goals. Reviewing these metrics regularly helps you adjust strategy, practice continuous improvement, and track ongoing vendor performance.
6. Know when to walk away
Recognizing when a vendor no longer meets your business needs is just as important as finding a great new supplier. Red flags may include frequent missed deadlines, deteriorating product quality, escalating costs without justification, poor communication, or a lack of innovation. These signs suggest it's time to reevaluate the partnership and explore better alternatives.
Streamlining vendor management with the right tools
Order.co helps companies tame the tangle of vendor information to bring more simplicity and efficiency to procurement. With the easy-to-use platform, you can centralize vendor data, track the metrics that matter, and unlock the benefits of strong, long-term vendor relationships.
To get started on better vendor management, schedule a demo of Order.co today.
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