Are you making the best purchases for your organization? How do you know if you are getting the best deals or receiving what you signed up for?
With effective vendor management, you can address these questions. As outsourcing continues to grow in popularity, these skills will become more valuable. Why? When a vendor plays a key role in your production and operations, you cannot survive without them. Imagine what would happen to the Detroit auto makers if their auto part suppliers experienced strikes or were otherwise unable to deliver? It would take a matter of days for that disruption to undermine the entire operation.
For purposes of this article, there is one assumption to keep in mind. We will be dealing with significant suppliers who either have significant spending ($1 million annually or more) or who play a critical role in the company. Applying this process to occasional small purchases generally does not make sense. This approach also assumes that you have specialized support available (e.g. legal advice) regarding contracts.
1. Develop vendor management strategy
As Stephen Covey wrote, “begin with the end in mind.” The first point to consider is how your approach will align with the organization’s strategy. For example, if your organization’s emphasizes safety and reliability (e.g. you run a power generation company), then that principle will guide your approach. Other strategy points to consider include: your budget, high level market research and determining user requirements.
Tip: You could use the user stories approach to start the conversation around user requirements.
2. Create vendor selection criteria
Deciding in advance how you will make your vendor selection is important because it reduces bias. The selection criteria used will be directly influenced by the overall strategy decided above. Leading organizations tend to use a scorecard or points system regarding criteria. Out of 100 points, 10 points can be assigned for industry awards, 30 points for pricing, 10 points for prior experience with your firm and so forth. The weighting system you use will reflect both your goals and understanding of what the market can provide.
3. Create a bid document
For large purchases and vendor relationships, the typical process is to use a “RFx” document to summarize your organization’s needs and seek bids. The three most common type of bid documents are:
- RFQ (Request for Quote): this mechanism is mainly used for commodity purchases where price is the most important or sore criterion. I have seen RFQs for carpet in office buildings.
- RFI (Request for Information): this process is used to obtain information from the market and support internal planning. An RFI will likely lead to a RFP in many cases.
- RFP (Request for Proposal): this document describes a business problem or need and asks for vendors to propose a solution. Calibrating a RFP to the right level of detail is vitally important. If the document lacks details, you will receive proposals with unrealistic pricing. On the other hand, if the RFP is too detailed, you run the risk of narrowing the marketplace to a few or only one vendor.
Tip: Want to see what RFPs look like? The U.S. government runs FBO.gov where companies can bid for government procurements. At the time of this writing, there are over 21,000 items listed. The sheer variety of RFPs is interesting: Aircraft Wash Equipment (U.S. Air Force), Tactical Tomahawk Weapons Control System (TTWCS) Parts Manufacturing (U.S. Navy) and High Performance Accelerometers for Space (U.S. Air Force)
4. Evaluate offers and select suppliers
If your bid documents are clear and present a clear business opportunity, you will have the good fortune to receive a variety of bids. It may be tempting to automatically choose the bid with the lowest price at this stage (especially if that presents a “win” for your department compared to the status quo).
By using the selection criteria you developed earlier in the process, you are more likely to make a strategic selection that will be satisfactory for the long term.
5. Negotiate the contract
At this stage, many companies focus their efforts on a single vendor. For high value vendor relationships, taking the time to negotiate a comprehensive contract makes sense. For context, I have seen public companies take several months to complete the negotiation process.
Tip: For IT services and providers, current hot topics for contracts including managing cybersecurity risk and addressing the use of sub-contractors.
6. Manage the vendor relationship
At last, you have a signed contract! Ready to move on? Unfortunately, that’s where many companies make a major mistake. Actively managing the vendor relationship yields a number of benefits including fulfilling internal audit requirements, finding ways to reduce costs and improving quality.
Here are two practical ways to manage the vendor relationship. First, make use of clearly defined “KPIs” (key peformance indicator) reports to assess vendor success. Second, schedule recurring meetings to discuss issues – positive and negative – with the vendor. By developing an effective relationship model, the vendor receives the full spectrum of feedback rather than only hearing about problems.
Further Resources For Vendor Management
The six step process outlined in this article is a starting point to guide buyers through the vendor management process. Here are additional resources to consider as you develop your process.
- PMBOK Guide. The Project Management Body of Knowledge Guide provides a useful framework of inputs, processes and outputs for vendor management. The PMBOK Guide refers to these activities under the heading of procurement management.
- Institute for Supply Management (ISM). I first heard about the ISM through their reports (“ISM Report on Business”) which are often cited in the news as an important economic indicator. The Institute also has publications and certification programs for seeking greater education in managing suppliers.
- Vendor Management: How Do You Measure Value for the Money? (CIO). This 2008 artiicle explores the question of measuring value when it comes to vendors. The four element balanced scorecard template described in the article is useful.
- Supplier metrics that matter (Supply Business). Published in 2005, this article remains useful to deepen your thinking on metrics. Jonathan Hughes makes a great point that traditional metrics have several flaws including a lack of connection to the organization’s goals and no connection to innovation.