Vendor Management is the management and control, by an entity, of those third parties that supply goods and/ or services to that entity. It is the discipline of establishing service, quality, cost, and satisfaction goals and selecting and managing third party companies to consistently meet these goals:-
- Establishing Goals- Just as employees need clearly established goals, operations need clearly defined performance parameters. When selecting or managing vendors, vendor managers must optimize their opportunity to achieve these goals by using third parties companies.
- Selecting Vendors- The fine art of vendor management is essential to optimizing operational results. Different vendors have different strengths and weaknesses, and it is the vendor manager’s responsibility to match the right company with the desired performance characteristics. Failure to consider this comprehensively could lead to complete failure.
- Managing Vendors- On a daily basis, vendor managers must monitor performance, provide feedback, champion new projects, define or approve/disapprove change control processes, and develop vendors. There’s a tremendous amount of detail to this aspect of the discipline, and we’ve covered this in many posts here.
- Consistently Meet Goals- Operations must perform within statistically acceptable upper and lower control bounds. Everything the vendor manager does should focus on meeting goals, from providing forecasts to defining requirements, from ensuring vendors have adequate staff to ensuring the staff have completed all required training.
An important objective in purchase management is that of maintaining good relations with vendors. A good vendor is an asset of the company; and, therefore, just as customer goodwill is considered important, a good relationship with the vendor should be treated likewise. A vendor who supplies the proper quality material in proper amounts in proper time is not very easy to find. Moreover, there are many situations where materials are required in hurry. There are situations where materials are in shortage in the supply market. In all such situations, good relationships with the vendors pay dividends. This may entail: personal relationship, professional relationship:-
- By helping the vendor in times of stress and strain with financial aid, by providing management skills if necessary, and,
- Maintaining a healthy professional relationship by fair negotiation, fair evaluation and fair compensation.
The modern management theory and world class manufacturing call for a long-term, almost a lifetime, association with the vendors. This also means that there will be fewer vendors but these will be dedicated vendors- almost a part of organizational family.
Until the present and even now, the Indian industry has not given/is not giving much importance to vendor relations. The emphasis, if any, has been on vendor selection and on monitoring the performance of the vendor through a vendor rating system. Vendor is the entity that is, generally, taken for granted. This attitude is: All said and done, the vendors for the company may change over a period of time. They may change to another business; some of them may not give the desired performance in quality, delivery and price, and therefore, one should always expect a drop-out rate in the vendors list of the company.
Selection of Vendors
1. The production capabilities of the vendor
(a) Capacity to manufacture the required product in desired quantities.
(b) Possibility of future expansion in capacity.
(c) The understanding or the knowledge of the vendor regarding the buying company and its need.
2. The financial soundness of the company
(a) The vendor company’s capital structure.
(b) Whether it belongs to a larger group of companies; whether it is a Private Limited or a Public Limited company.
(c) The profitability record of the company in the past.
(d) Expansion plans of the company in the future.
3. Technical capabilities
(a) Whether the available machines are capable of the required quality of materials? What are the future plans of the vendor?
(b) Whether there are enough technical skills available with the vendor?
(c) Whether there is proper research, design and development facility available with the vendor?
(d) What is the record of the vendor in filling the orders of other buying companies in the same business?
(e) What has been the consistency in the quality produced by the vendor?
(f) Whether the vendor has appropriate storage and warehouse facilities to retain the quality of the product produced?
(g) Whether proper quality control procedures are being followed in the vendor company?
4. Other considerations
(a) What are the working conditions in the vendor company?
(b) How are the industrial relations in the vendor company?
(c) Whether there is any possibility of disruption of the supply of materials in terms of quantity and/or quality due to human relations problem in the vendor company?