Back To Basics: Vendor Management In High Risk Supply Chains

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The concept of engaging external parties to do work for your business is probably as old as the concept of business itself. The inherent us vs. them relationship means there are often procedures, documents, and checkpoints, to make sure the vendor does things in your best interest.

In high risk supply chains, where the majority of work is subcontracted to third parties (e.g. construction, mining, utilities), the importance of vendor management can’t be stressed enough.

What is vendor management?

Let’s take a look at some definitions for vendor management.

“Vendor management helps organisations take third-party vendor relationships from a passive business transaction to a proactive collaborative partnership.”

This definition from CIO accurately captures the transformation of a vendor relationship and gives us the overall “vision” for a vendor management program.

Digging more into the “how”, this definition from Gartner also adds that it’s meant to be a life cycle:]

“Vendor management is a discipline that enables organisations to control costs, drive service excellence and mitigate risks to gain increased value from their vendors throughout the deal life cycle.”

The different nuances of vendor management

Looking at vendor relationships from a life cycle’s point of view, we can broadly see vendor management activities through two lenses as follows.

The trust building lens

It might sound adversarial, but when a new supplier is about to enter your supply chain, that carries a degree of risk. At this stage, most interactions are about assurance, governance, and minimising risks.

Vendor compliance management then comes in, with prequalification (for potential vendors), on-boarding and requalification (for current vendors).

The influence might tilt more towards the organisation’s side –because after all, vendors are trying to win trust and ongoing work. A counterargument though, making your vendors jump through hoops in the name of compliance is not a good long-term strategy. Trust has to be a two-way street.

An example vendor on-boarding process in Felix Vendor Management module

The next aspect is to do with performance management.

“If you can’t measure it, you can’t manage it”.

Giving feedback, capturing it, storing and sharing it to the right stakeholders ensures ongoing value for the organisation. While the topic of vendor performance management deserves a whole book on itself, the important thing to note here is the closed feedback loop – between you and your vendors, as well as between you and other internal stakeholders.

An example vendor performance management framework

Closely related to performance management is contract management. Nobody wants to dwell on the nitty-gritty around change requests, dispute resolution, liabilities and so on until something happens, e.g. an accident or conflict. All the trust built previously could be in jeopardy if lines were not drawn in advance.

The collaborative lens

By the nature of outsourcing or subcontracting work to third parties, collaboration might not be the first word that comes to mind.

But it’s worth noting what great vendor management can do – as in the definition outlined earlier in this post, it’s about turning “a passive business transaction to a proactive collaborative partnership.”

This is where you determine the common goals to work towards, prepare to have empathy and even to “sell” to your vendors. If you’re interested in exploring supplier collaboration as a concept, this McKinsey article provides some good background context.

Building on that, “emotional intelligence” could be an important attribute for anyone responsible for vendor management.

Often, organisations “dictate” their goals to vendors, ask for price reductions, extended payment terms etc. But this is not a sign of a collaborative strategic partnership. Some wise words from the article:

“Suppliers would continue smooth operations with clients that they have a collaborative relationship with. Hence, my advice to my dear colleagues is to be adaptable and flexible. The socio-political situations change in a matter of hours. It is important that we are open to change, based on the business needs. Do not hide behind processes and policies.”

Challenges and hidden opportunities

The premise of vendor management is not new. But with all that’s happened in the past year, the imperative for organisations to get a grip on vendor relationships has become more pronounced.

Renewed focus on risk

For high risk supply chains, vendors and third-party service providers are your “extended enterprise.” Yet quite often, it’s not subject to the same rigour of risk management as your internal workforce.

The “extended enterprise”. Source: Deloitte

Some stats such as this has prompted the need to strengthen vendor management capabilities:

“90% do not recognise the need or have appropriate knowledge, visibility or resources to monitor subcontractors.” (Deloitte)

Additionally, the pandemic has caused shifts and challenges in the global supply chain. Organisations might find themselves dealing with financially struggling suppliers, temporary shortages and disruptions to operations.

Efficiency

Imagine a reaction to the renewed focus on risk above is to go requalify existing vendors and prequalify new vendors on a mass scale.

Imagine also that the current method to handle all those processes is via spreadsheet and email.

The labour-intensive processes around prequalification, onboarding and requalification can lead to strains on relationships, especially if there is a lot of double handling, misinformation or back-and-forths.

With or without the imaginary knee-jerk reaction above, any efficiency gain in a key vendor management process would help reduce costs – potentially for both you and your vendors.

Grow revenue

Tightening margins, reduced productivity and increased costs following COVID-19 mean many are forced to do more with less.

The power lies in the knowledge you have about your vendors, who the strategic and top performing vendors are. Now is the time to strengthen those relationships and align on key objectives for the recovery period.

Again, do you and other internal stakeholders know who they are?

Interested in an industry standard prequalification framework that’s built into a vendor management solution? Learn more about Vendor OptiqualTM here.

Orignally posted on the Felix blog.

About Author

mm

Sam is an Account Executive at Felix, and has been at the forefront understanding and resolving procurement headaches resulting from paper based, admin burdensome tasks currently undertaken by construction companies across QLD, NT and New Zealand. Sam's always open to chat about how technology can give back time to one's day.

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