Vendor Management Lifecycle Stages and Best Practices

If you have dozens or even hundreds of vendors within your procurement program, you know all too well the overwhelming task of managing them all. It’s easy to get complacent, shuffle along with old contracts, and waste time putting out fires. Yet diligent efforts to control and track supplier relationships are vital to your business. The stages and steps of the vendor management lifecycle deliver a better way to monitor your vendor pool and working capital.

The vendor management lifecycle approach helps handle all aspects of the supplier relationship, from vendor selection to offboarding. It supplies useful details regarding who you’re working with, how they’re performing, and when to consider other options. It can help organizations beat the average indirect spend rate of 20 to 30 percent of revenue.

Let’s look at what goes into a strong vendor lifecycle management program and ways to improve your current program.

Download the free tool: Vendor Risk Management Checklist

What is the vendor management lifecycle?

The vendor management lifecycle is a comprehensive approach to handling supplier relationships, from initial selection to the end of supplier contracts. Vendor lifecycle management helps businesses optimize operational efficiency, ensure compliance, control costs, and foster strong, strategic partnerships with suppliers. It enables organizations to get the most value from vendor engagements while reducing potential third-party risks.

5 Stages of the vendor management lifecycle

Vendor management is a bit like a flywheel. New vendors come on as needed, and finance or procurement teams manage them throughout the relationship, hoping for a collaborative process. Regular performance management ensures the business continues to get the best price and terms, and vendors leave the pool when needs or performance change.

Here’s a closer look at the vendor lifecycle:

1. Vendor sourcing and engagement

A diligent and repeatable vendor sourcing process is important to ensure you identify and engage with high-quality suppliers who can meet the company’s requirements. It helps ensure the vendor offers competitive pricing and contract compliance.

When vetting a new supplier, consider the following factors:

Cost competitiveness: Evaluate the cost-effectiveness of their services or products. Consider not just the upfront costs but also long-term expenditures, including any hidden fees.
Reputation: Perform due diligence regarding potential vendors’ market reputation, customer reviews, and any awards or recognitions they have received. This gives you insight into their reliability and quality of service.
Compliance: Ensure the vendor complies with industry standards and legal regulations. Check for relevant certifications necessary for business operations.
Scalability: Determine whether the vendor can accommodate growth or adapt to changes in demand without compromising quality or delivery expectations.
Communication: Evaluate their approach to communication and customer support. Reliable vendors should offer clear, consistent communication channels and robust support systems.

2. Vendor onboarding

After thoroughly vetting vendors, the supplier onboarding process is pivotal to establishing a successful partnership. This phase involves integrating new vendors into existing systems, ensuring they understand and adhere to company policies and expectations. Effective onboarding helps lay a strong foundation for collaboration and streamlines purchasing for better operational efficiency.

Procurement and finance teams usually conduct the following steps when bringing on a new vendor:

Review and finalize vendor agreement documents, ensuring all terms and conditions are clearly understood.
Conduct necessary supplier information management, including tax forms, payment details, and contact information.
Set up access to any required systems or platforms.
Introduce the vendor to team members with whom they will work directly.
Provide the training or resources required to comply with the company's policies and standards (e.g., security protocols).
Ensure all relevant stakeholders are aware of the new vendor relationship and understand their role in its success.

3. Supplier performance management

Supplier performance management is a program to assess and track the quality, efficiency, and reliability of a supplier's goods or services. It aims to ensure consistent delivery standards and identify areas for improvement or corrective action. Performance management helps foster strong supplier relationships and enhance overall supply chain effectiveness and alignment with business objectives.

Managing vendor performance can profoundly affect contract performance, which is why half of CPOs say supplier relationship management is a top initiative for 2024. Departments that successfully supervise their supply chain see better price performance, improved contract compliance and contract lifecycle management, and fewer purchasing disruptions.

Here are a few ways to oversee supplier performance within an organization:

Conduct periodic performance evaluations to assess vendor compliance with the agreed-upon metrics and deliverables.
Implement a scorecard system to quantitatively measure vendor performance across various dimensions, such as quality, delivery, cost, and responsiveness.
Develop and maintain a feedback mechanism that allows for the continuous exchange of information between the company and the vendor.
Establish corrective action plans in case of underperformance or noncompliance with contractual obligations.
Engage in strategic sourcing and supplier enablement initiatives to continuously identify opportunities for cost reduction and process optimization.

Download our free Vendor Scorecard Template to make objectively evaluating vendors easier.

4. Risk management

Third-party risk management practices within vendor lifecycle management help companies mitigate risks and ensure business continuity. They help stakeholders identify, assess, and prioritize potential issues associated with third-party vendor relationships. This allows organizations to take proactive measures that minimize negative impacts on operations and financial performance. A strategic risk-management approach ensures long-term partnership stability and success.

Vendor risk management should feature in every stage of the vendor lifecycle, from sourcing to offboarding. Use these techniques to reduce risks wherever possible:

Assess the financial stability of vendors to ensure they can fulfill contractual obligations over the long term.
Understand the legal and compliance risks associated with each vendor, especially those operating in highly regulated industries.
Identify potential operational risks, such as supply chain disruptions or failures in service delivery.
Analyze the cybersecurity, data protection, and service uptime measures vendors use to protect sensitive company data from breaches or leaks.
Review environmental, social, and governance (ESG) practices to align with corporate sustainability goals and mitigate related risks.

5. Offboarding

The vendor offboarding process is crucial for maintaining security and compliance. Proper offboarding ensures organizations limit access rights and maintain confidential information. It allows for a smooth transition by resolving outstanding issues and retrieving company assets. Codifying and enforcing strong offboarding protects the company's interests and reputation while managing the vendor relationship through its conclusion.

Use these best practices to ensure smooth offboarding:

Notification: Inform the vendor of the decision to terminate the relationship, providing clear reasons and adhering to any contractual notice periods.
Contract closure: Review and settle any outstanding contractual obligations, including final payments or penalties, as per the agreement.
Data retrieval or destruction: Securely retrieve company data from the vendor and return any physical or intellectual property assets.
Access revocation: Remove the vendor’s access to company systems, facilities, and sensitive information to safeguard against unauthorized use.
Documentation: Update internal records to reflect the termination of the relationship, archiving relevant documentation for future reference.

10 Signs you should improve your vendor lifecycle management program

Vendor management is an ongoing project. Without maintenance, you may see symptoms such as inefficient processes, miscommunication, and delays in vendor onboarding or termination. Such issues indicate the need for increased streamlining and process improvements. Addressing these problems can lead to more effective partnerships and operational efficiency.

Consider ways to streamline and automate the vendor management lifecycle if you see one or more of these common issues cropping up in the procurement process:

Frequent communication breakdowns, misunderstandings, and delays
Inconsistent quality of goods or services
Increasing costs without corresponding improvements in service or product quality
Lack of contract compliance, including missed deadlines
Difficulty getting support or resolving disputes
Evidence of declining financial stability or vendor reputation
Limited flexibility in adapting to changing business requirements
Regular need for escalation to resolve routine issues, indicating systemic problems
Poor data management practices, which risk confidentiality and integrity of information
Minimal proactive engagement or innovation coming from the vendor's side

How to optimize your vendor management lifecycle

Plenty of opportunities exist to improve your vendor management system, from vendor selection to conclusion. Use the following methods to optimize vendor interactions and purchasing processes to ensure continuity and risk reduction:

Establish clear communication and reporting protocols, confirming both parties understand expectations and requirements. Schedule regular review meetings to discuss performance, challenges, and opportunities for improvement.

Implement a performance evaluation system based on mutually agreed-upon KPIs to regularly assess vendor contributions and identify areas for enhancement. This system should be transparent and aim to foster continuous improvement.

Develop a strategic partnership approach rather than a transactional relationship with vendors. Encourage collaboration and innovation by involving suppliers in planning sessions, sharing long-term business goals, and exploring joint development projects.

Create a risk management solution that addresses potential issues related to the vendor, such as financial instability or failure to meet contractual obligations. This plan should include regular risk assessments and mitigation strategies.

Leverage technology by adopting a procurement strategy with a management platform like Order.co to streamline processes, enhance transparency, and improve decision-making through data analytics. Such platforms facilitate better communication, document management, and compliance tracking throughout the vendor lifecycle.

Vendor management in action: Physical Rehabilitation Network

Overseeing purchasing across scores of locations demands a whole new level of vendor management. As a physical rehab brand with over 140 US locations, vendor pool and purchasing challenges were having a massive impact on Physical Rehabilitation Network (PRN).

PRN was struggling to control the purchasing process using manual workflows that required contacting every vendor individually to place hundreds of orders. This massive manual effort burdened staff already stretched thin during the COVID-19 pandemic.

PRN partnered with Order.co automated vendor relationship management software to streamline its purchasing process and consolidate its supplier pool. Through the platform, PRN pared down to just 85 high-quality vendors, saving them thousands of dollars per month and enabling 99 percent spend visibility with only one monthly invoice to pay.

Facilities and Purchasing Coordinator Liz Windle calls the time she saves with Order.co “a priceless gift.” With a simplified vendor management process, she can now focus on other initiatives and control monthly spend.

Would your business love to reap the same savings and time-efficiency benefits as PRN? Schedule a demo with Order.co to get started.

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