Vendor Management

Complete Guide to Vendor Management System, Processes & Steps

This guide talks about the vendor management system, its process, & the stages. Read for vendor management process & the best practices to follow.

Running a successful business requires a strategic thought process and knowledge about all the ways of being more efficient. One such facet of organizational skills is Vendor Management. We will discuss the various aspects of Vendor Management in-depth.


 What is Vendor Management System (VMS System)?


What is Vendor Management System (VMS System)?

The Vendor management process empowers an organization to take appropriate measures for controlling costs, ensuring the delivery of excellent services, reducing potential vendor-related risks, and gaining value from vendors in the long run.

It includes researching the best-suited vendors for sourcing pricing information, measuring the work quality, managing vendor relationships, evaluating performance by setting unique standards and ensuring on-time payments. Vendor Management Systems (VMSs) are online web-based tools acting as a single junction to manage all vendor-related activities in any organization to improve efficiency and long-term cost-effective growth.


Why is a Vendor Management System important for any business?


Vendors play a critical role in any business. Therefore, it becomes absolutely necessary to have a monitoring system in place. A vendor management system can help your track the delivery of goods and services from your vendors as well as their payments. There are number of important points that we want to focus on while talking about vendor management system.


 Risk Mitigation

A popular business strategy is outsourcing operations to third-party vendors allowing businesses to save money while increasing efficiency. However, it may attract several risks as follows:


  • Cybersecurity Risk
  • Compliance Risk
  • Reputational Risk
  • Financial Risk
  • Operational Risk
  • Strategic Risk


At such times, having a Vendor Management System in place becomes essential to mitigating these risks.


Performance Optimization


The performance of your business depends on several factors, some of which are beyond your domain of expertise. For example, if your vendors don’t function exactly the way you want them to, it can affect your business negatively. Thus, a robust Vendor Management System needs to be in place so that you may optimize your business performance.


Cost Reduction


Many companies across sectors are under budget constraints. Hiring has been put on hold. Supply Chain Management Processes are under scrutiny. Overall, resources are being stretched thin. Yet that doesn’t mean businesses can afford to cut back on areas like Vendor Management. On the contrary, emphasizing Vendor Management could help free up some budget while streamlining risk management. Your organization can unlock new cost savings by turning to an outsourced Vendor Management partner.


Create Loyal Relationships


Building and maintaining great vendor relationships is a must to stay competitive. Having healthy relationships with these vendors helps ensure that your shelves are healthily stocked with excellent products that bring delight to your customers.


Increasing Administrative Efficiency


The right Vendor Management System or VMS System can significantly cater to administrative efficiency. Acting as a central hub for the historical and current data of vendors, your VMS program can:


  • Proactively reduce errors
  • Eliminate Data duplication
  • Stop the loss of information
  • Decrease overall costs of administrative labor
  • Manage vendor relationships more efficiently


Increase Onboarding Speed


A slow onboarding process can bring down your productivity while costing you more. However, onboarding the right vendors quickly enables you to fast track through the sourcing or procurement process. It, in turn, brings your goods or services timely for optimum utilization.


Protect Your Brand


Since you must never compromise on your brand’s image, it is better to know beforehand with whom you are associating. A sturdy Vendor Management System will tell you a supplier’s social and environmental standards. It will enable you to stay away from vendors who do not measure up to your brand’s standards.


Vendor Management Processes

Vendor Management Processes

Having an effective Vendor Management Process is crucial. An organization must plan and apply a step-by-step process of engaging with their vendors. It is virtually impossible to have one ultimate Vendor Management System or Process to serve all industries. However, we can focus on the basic steps that are common in almost every organization’s vendor-engagement space, as follows:


Establishing Business Goals


Identifying and establishing business goals involving vendors is critical before the Vendor Management Process begins. It helps in preventing duplication of efforts. Since these goals help set up a well-rounded measuring system, they enable you to evaluate vendor performance effectively.


Choose the Best Vendor for You


It would help if you evaluated every prospective Vendor based on:

  • Experience
  • Quality Commitment
  • Resources
  • Track record

Then, following these two steps will get you the best vendors for you-


Step 1: Choose the vendors that align with your specific business goals.

Step 2: Establish strategic vendor relationships. Buyers must forge long-term strategic vendor relationships.


Manage Vendors


After recognizing the business goals, a business should build a dedicated Vendor Management Team. This team will run the VMS System – identify business goals for Vendor Management, select the right vendors, negotiate contracts, occasionally assess vendor performance, and track all related activities.


Consistently Meet Goals


Finally, you’ll want to achieve your goals through your relationship with vendors. It means supporting them with the information and tools needed to provide consistent quality products and services to your organization.


Assess Everyone’s Involvement


Vendor Management is not the sole responsibility of just one Vendor Manager. The oversight of both the board and the management is vital for effectively managing vendors.


Select a Central Location for Information Related to Vendors


Organizations require a one-stop library of all policies, procedures, and documentation related to vendors since Vendor Management or a Vendor Management System involves collaboration. Any relevant personnel should be able to access contracts, due diligence, risk analyses, business plans, and other documents to manage vendors smoothly.


Reviewing Contracts


It is imperative to go through the contracts and check on each Vendor’s services and when the contracts will expire. Pay attention to all the promises of reports, audit results, and other documents in the contracts. Note down auto-renewals, expirations, and duplicate services. Renegotiating old contracts can also save your organization quite a lot of money.


 Identifying High-Risk Vendors


A high-risk vendor is one that performs or provides vital functions or services for your organization. It means that:


  • It could cause severe risk to the business if this Vendor fails to deliver on their commitment
  • They require significant resources to execute internally
  • These vendors handle sensitive customer information
  • They can affect earnings, profits, capital or reputation of your organization with their poor performance


You must identify high-risk vendors because they present a significant risk to your institution. For example, hackers disabling the platforms of your mobile banking service provider.


Conducting Due Diligence

Conducting Due Diligence

While the vendors have to promise you different documents in their contracts, it is your duty to collect those records. The most basic vendor management technique is to keep track of your vendors’ financial or legal problems or fluctuation in reputation. No organization should sign a contract before conducting due diligence and even while being in a relationship with the vendors.


 Risk-Assessing Your Vendors


While managing vendors, one must understand their institution’s risk appetite. The board of directors of any organization sets the risk appetite as part of their business strategy. So, a vendor manager has to consider if the costs and risks of collaborating with a particular vendor align with the predetermined strategy.


Engaging in Ongoing Monitoring


Confirming that the Vendor complies with all the legal and regulatory requirements is of the utmost importance. One must test the Controls regularly. The organization should track if vendors meet the agreements, performance metrics, and other contractual terms.


Track Findings


You must periodically report the findings from the oversight process to the board or a committee, especially for vulnerabilities that you can fix quickly.


Negotiate Contracts


Contracts in a vendor management system are important documents that outline the terms and conditions of your engagement with the vendors. Terms in a contract should be specific, measurable, and detailed. Contracts should ideally address:


  • Confidentiality
  • Ownership of intellectual property
  • Dispute resolution
  • Business continuity and contingency plans
  • Data privacy
  • Frequency of data reports and audits
  • Subcontracting


The Types of Vendor Management Systems


There are several types of Vendor Management Systems based on the vendors’ functions. Let us now discuss the various Vendor Management systems:




This vendor system helps manage due diligence processes that must be followed while choosing vendors and purchasing goods.


Vendor Onboarding


This system takes the enrollment and registration steps to get new vendors on board and grants access and permissions to each Vendor.


 Relationship Management


Establishing and maintaining positive work relationships with vendors.


 Vendor Risk Management


The vendor risk management system identifies and mitigates vendor-related risks like information security, financial stability, delivery time, etc.


Financial Controls


This system sets the spending and budget limits for the Vendor Management team.


Performance Management


The focus of Vendor Performance Management systems is conducting regular evaluations of vendor performance by tracking quality, consistency, and reliability. Usually, such systems maintain dedicated scorecards for the vendors in their database.


SLA Management


Vendor Management Systems outline the services that are expected from the vendors. These systems also dole out the remedies to vendors in case of non-compliance to Service Level Agreements (SLAs).


Contract Management


Managing the lifecycle of Contract negotiation, amendment, renewal, execution, obligations management and termination.




Establishing standards and compliance controls in areas such as sustainability..


Vendor Managed Inventory


We discussed about different types of vendor management processes or systems. But when it comes to effective inventory management, vendor managed inventory is an amazing technique. It tremendously helps in supply chain management. When the vendor manages your inventory or a part of your inventory, we call it Vendor Managed Inventory or VMI. To understand it better, here is an example:

Suppose, you are running a super mart and you have tie-ups with different brands. Now, when you display the products of a brand, say ITC, you need to manage its inventory as well. Every time the display rack for ITC products is empty, you need to place fresh orders. This is the basic of inventory management.

If ITC itself tracks its product inventory in your retail shop, you can rest assured it will replenish the supply before it runs out. It is called VMI or vendor managed inventory.


Stages of a Vendor Management System or VMS System

Stages of a Vendor Management System or VMS System

Sharing Goals and Establishing Priorities


Setting forward clearly prioritized and measurable goals is vital for any Vendor Management Strategy to start working.

Then, share these predetermined goals with the vendors. It will essentially open up a line of communication between you and the Vendor based on strategic goals and KPIs.

The Vendor can predict your needs and anticipate your internal shortage of resources to assist you better. As your relationship with the Vendor progresses over time, review and discuss your objectives with them to make necessary changes.


Identifying and Selecting the Right Vendors


Locate the vendors who can fulfil your business objectives with minimal acceptable risk. Ensure you include the selected Vendor in your meetings so that they can voice their concerns. It is also a productive way of creating mutual trust between the Vendor and buyer.

Finally, focus on forging long-term relations with vendors, especially those who are strategic partners.


Negotiating a Win-Win Outcome


It is advisable to carry on negotiations till you and your Vendor arrive at mutually acceptable terms. To achieve this, you must first know your vendor’s business objectives.

It’s essential to remember that, just like you, your Vendor is also looking after their best interest. Therefore, it is not always a good idea to pressure them to reduce costs or speed up the delivery time. It may affect the quality of the product or service. Working collaboratively toward an agreement that fills both parties with confidence about the contract terms is recommended.


Monitor KPIs and Maintain Communication


Businesses often engage with vendors believing that they will adhere to the terms mentioned in the contract. However, that is not what happens in most cases. Thus, it’s crucial that every business continuously monitor the performance of their vendors.

The key areas that businesses should pay attention to when assessing their vendors’ performance include:


  • Time taken for delivery
  • Time taken for Shipping
  • How soon does the vendor answer calls
  • Quality of service
  • The accuracy of ASN (Advanced Shipment Notice)

Ensure that your Vendor Management Systems keep track of the abovementioned metrics. It will allow you to evaluate them properly during contract reviews. You can arrange regular personal or video meetings with your vendors to avoid misunderstandings and frustration. It will enable you to understand better timelines and predict future performance.


Invest in the Right Tools


It is futile to store large amounts of procurement-related data on local hard drives in an increasingly globalized arena. Manual systems like this are prone to human error and reduce productivity. It makes sense for businesses to invest in the right tools to use their data better. The right Vendor Management software can help automate tasks and use cloud technology to store information securely. You can start by investing in Vendor Management Software to mitigate vendor-related risks, measure performance, and automate payments.

Challenges in Vendor Management

Challenges in Vendor Management


Vendor Compliance Risk

One of the crucial to-dos of vendor management systems is establishing standards before onboarding vendors. It can save you time and money. Choose a suitable vendor who can meet your organizational standards while delivering excellent performance.


Vendor Reputation Risk

Dealing with multiple vendors often hinders the assessment of the quality of work. Some vendors may deliver your tasks on time, complying with all your quality parameters; others can perform poorly and affect your commitments. Hence, it is crucial to check the Vendor’s reputation before signing a contract.


Lack of Visibility

While it is imperative to have a centralized data storage solution for managing vendors’ data, it also benefits the organization from a centralized view and improved visibility, leading to better resource allocation and efficiency.


Vendor Data Storage

As your organization grows, it becomes essential to have an efficient Vendor Management System with vendor data storage solution. Storing and accessing data may be difficult if no Vendor Management system is deployed.


Vendor Payment Risk

Most vendors stick to standard payment terms. However, others may have different terms. It is vital to figure out these terms and make payments on time, especially when dealing with multiple vendors simultaneously.


Vendor Management vs Vendor Relationship Management


Vendor Management and Vendor Relationship Management are not the same. Let’s see some of the key differences:


Vendor Management

Vendor Relationship Management

This term is used for describing the

whole process related to vendors.

It refers to the human component

of the process.

People offering services or products

represent the vendors.

Establishing good relationships with

those people is called Vendor

Relationship Management.

Handling the vendors keeping in

mind the needs of the buyer.

Taking care of the vendors to forge

a long-lasting relationship while

garnering mutual respect.


Tools to consider for Vendor Management System


Tools to consider for Vendor Management System

It is impossible to describe all the tools a manager would need to run a well-rounded Vendor Management System. Instead, here is a list of four essential Vendor Management tools to address the most common problems of Vendor Risk Management:


1. Template Resources

An archive of proven sample templates for any situation contributes a lot to an organization’s success in Vendor Management.

Starting with trusted generic templates, you can slowly build up an internal repository that covers your organization’s needs in detail.

2. Risk Management Frameworks

Every industry follows a list of best practices. As a manager, you must use these lists to guide the actions of your department.

3.  Automated Vendor Risk Management Tools

Your vendors may be an excellent fit for your organization. Still, the systems and technology may have security issues that take considerable time to find out. It is recommended to bring in outside vendor tracking services to notify you if your vendors are having problems.

A vendor may not want to disclose the details of its security without an audit. Even if they did, the information in the audit might not be relevant to current times.

4. Vendor Inventory Tracking

Track all interactions with your vendors. It allows you to create a library of all past work performed and create detailed relationship profiles for future work needed. You can find these tools, including Inventory Management Systems, in the cloud to dramatically reduce deployment and administration efforts.



The term ‘Vendor Management’ may sound like a new concept to some. However, it has been in practice for thousands of years since the first time, humans decided to do business.


Vendor Management, in essence, is relationship maintenance. Forging a deep connection with vendors through direct and transparent interactions. Investing in a Vendor Management System is a step in the right direction for any organization.


Having a solid network of vendors at your disposal can save you a lot of money and time while increasing your profits.


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Related Articles


  • Vendor Management enables organizations in controlling costs, driving service excellence, and mitigate risks. These, in turn, let the organization gain increased value from their vendors throughout the relationship.

  • Vendor Managers, Senior Management, and the Board of Directors are responsible for Vendor Management. Everyone who deals with a vendor is responsible in some way or another for managing vendors.

  • If businesses effectively implement Cross Selling and Upselling strategies, it adds more value for the customers. It results in customer satisfaction, retention, and loyalty while driving up its revenue.

  • Here are the main ways to identify an Upsell opportunity: 

    • Ask questions to understand if the customer is there to buy products
    • Present a deal in passing that is relevant to a customer - inform them why purchasing a particular item will be a win for them
    • Understand the primary pain points of the customer and offer a solution that is better than what they had expected
  • The most important thing is to suggest and recommend products relevant to helping them achieve their goals. There should be no random Cross Selling or Upselling attempts. It may hamper your relationship with the customer.

  • Absolutely! Without Cross Selling and Upselling, businesses would not grow or be able to help customers derive value from their purchases.

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