June 16, 2022
Explainer

Understanding the vendor management lifecycle to maximize vendor ROI

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Vendor relationships, even when they’re delegated to departments or employees, are the responsibility of the business owner or executive team. The vendor management lifecycle is critical to success, from pre-contract to contract termination. To get maximum value out of vendor relationships, businesses need to properly manage each stage in that lifecycle.

Breaking this down into stages provides insights into areas where optimization and correction can occur. In this article, we’ll review the seven stages of the vendor management lifecycle and offer some suggestions on how to properly manage each one of them. 

What is the vendor management lifecycle?

The vendor management lifecycle is a “cradle to the grave” approach to managing vendor relationships. It begins with identifying and engaging with vendors and continues through the life of the vendor contract. It end in the termination of the relationship and moving on to the next vendor for that particular product or service. 

Other items in this lifecycle include the vetting process and evaluating risk, then the actual onboarding. That’s the point where vendor management becomes a maintenance task. Performance, supply risk, and communications need to be optimized regularly.

Offboarding at the end of a vendor relationship is equally important. There needs to be an exit strategy and plan in place for moving on. Smart companies review vendor contracts on an annual basis and look for better terms and conditions to cut costs. That may come from an existing vendor or a new one. 

Why businesses need to understand the vendor lifecycle

This may seem too complex for businesses in the startup phase, but you can better facilitate growth and expansion by laying a strong foundation early on. You can control it with the proper tools, some proactive decisions, and an understanding of how it works.     

Vendors provide the raw materials, goods, and services your company needs to survive. The vendor relationship lifecycle is aptly named because those relationships are the lifeblood of your company. In the next section, we’ll break down each stage in that cycle and explain how to optimize it to get the most out of your vendor relationships. 

Vendor lifecycle stages

Outlining and defining the stages of the vendor lifecycle is an exercise that can benefit everyone involved in vendor relationships. That starts at the top with ownership. Involvement in this process is essential. Your company’s dealings with vendors can affect your businesses’ reputation, so it’s important to have a system in place on how to manage them. There are seven distinct stages in the lifecycle where policies and procedures can be implemented.

1. Initial identification and engagement

 

It’s important to do business with vendors that share your values and philosophies on how to do business. Forward-thinking companies with high levels of awareness make a list of all the qualities they’re looking for in a partner. Do they have an ESG rating? Are they diverse? Does the company engage in socially conscious activities?

 

These data points aren’t just for pre-screening purposes. They’re also icebreakers for initial engagement. Discussing shared beliefs and values is a great way to get to know someone. Remember, what you’re doing is building a relationship. That involves much more than just placing and filling orders. You'll also need effective communication.    

2. Vendor qualification and risk mitigation

 

There may be several vendors on your list after the first phase of this lifecycle or you could find “the one” right away. In either case, the next steps are to evaluate what they have to offer and assess vendor risk. If you’re dealing with a larger group, send out requests for proposals (RFP) or invitations for bid (IFB) so you can gather and compare the numbers and terms.

 

Risk assessment with a vendor is two-fold. The first question is whether they can handle the volume you require. The second is whether they’ll be around long enough to fulfill the entire contract. Newer vendors may offer lower prices, but they may not be in business six months from now. Review their financials and check references before selecting them. 

3. Vendor onboarding and information management

 

Onboarding is inputting payment data into your accounting system and setting up communication channels between your company and the vendor. This is also where point people are assigned and areas of accountability are defined. Documenting each step in the process will help you create policies and procedures for future vendor relationships.  

 

If you haven’t done so already, this is a good place to implement vendor management automation. This can be done earlier to help with vendor selection and defining contract terms, but it becomes essential once you get to the onboarding phase. It’s a valuable tool for performance monitoring, contract renewals, establishing goals, and fielding new bids.  

4. Performance management

 

Measuring the performance of a vendor can be done by utilizing vendor scorecards, vendor ratings, or performance reviews. Ideally, you’ll want all three to effectively determine whether you’re getting the most out of your vendor relationships. Scorecards and ratings can be submitted by your receiving department. Reviews should be done internally using that data.

 

Communication is also a key metric in measuring performance, but some of the data may be anecdotal. Everyone has bad days and communication breakdowns could be on your side, not the vendor’s. Keep this in mind when using communication as a performance metric. Look for patterns of behavior rather than individual instances.    

5. Supply risk management

 

Risk is always a factor in supplier management. Disruptions in the supply chain since 2020 and rising inflation have caused price volatility, fluctuations in demand, and company closures. Monitoring these conditions is part of doing business in a post-pandemic world. They affect vendor relationships, delivery schedules, and bottom-line profits.

 

Some of the uncertainty of the risks listed above can be alleviated with carefully designed vendor contracts that clearly define expectations and liabilities. Other risks, like payment disruptions and duplicate invoicing, can be eliminated with automation and software integrations. We’ll get into that in more detail in the final section of this article.        

6. Vendor relationship management

 

Stages 1 through 5 are about systems and processes. Vendor relationship management requires communication and human interaction. Relationships need to be cultivated. Problems that require attention need to be solved, not simply glossed over as “one-time issues.” Fix what’s broken and do it in a collaborative manner so you don’t have the same issue again. 

 

Turnover is another area where vendor relationships can break down. Allowing one person to monopolize vendor communications puts your company at risk if that person moves on. Creating a central database accessible to multiple parties can eliminate that problem. Adding additional touches to the vendor relationship task list also helps.  

7. Vendor offboarding

Vendors can terminate their contracts voluntarily or your company can choose to move on to another one. In either case, the way your company handles the situation will determine whether it’s a smooth transition or a rough one. Successfully ending a vendor relationship is just as important as starting a new one.  

Document the reasons for the exit and the process you employ to make it as easy as possible. This should be a common theme throughout the vendor management lifecycle. Running a business is a learning process, no matter how much experience you have. Every company is different—times and circumstances change. Documentation helps you adjust to that. 

       

How Ramp can improve your vendor lifecycle management

Ramp has several tools and services to help you manage the vendor lifecycle. These include vendor payment optimization, automated savings insights, vendor-specific virtual cards, one-click automated vendor contract negotiation, and all-in-one vendor contract management. Our procurement team can save you an average of 27% on new contracts. 

One of the more popular features at Ramp is our ability to limit employee expenses to only specific vendors. Imagine providing a corporate card to the sales team that’s only good at Best Buy and Staples. They can’t use that for morning coffee, but you can track their electronics and paper supply spending. Our dashboard does it for you in real time.

Most of what we do is automated, but our procurement team is made of live human beings with years of contract negotiation experience. All you need to do is upload your contract and we take it from there.

Learn more on our vendor management page. 

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