Vendor relationship management: The competitive advantage most businesses ignore

Vendor relationship management (VRM) is the structured approach businesses use to select, onboard, monitor, and collaborate with vendors. It ensures companies get the best service, pricing, and reliability from their suppliers.

Companies that actively manage vendor relationships see higher customer satisfaction, better product quality, and stronger financial performance.

Why vendor relationship management process can make or break your business

Vendors directly impact your costs, business operations, and customer experience. A reliable vendor keeps your supply chain moving, helps you control expenses, and ensures product quality. A bad one causes delays, unexpected costs, and compliance risks.

Most businesses experience major disruptions because of vendor issues. Late shipments, poor service, and miscommunication lead to lost sales and unhappy customers. On average, a single supply chain failure costs companies $184 million per year.

Vendors who see you as a long-term partner offer better pricing, faster service, and greater flexibility during high-demand periods. When problems arise, they are more likely to work with you to find solutions instead of leaving you scrambling for alternatives.

Neglecting a structured vendor management system leaves your business vulnerable to costly pitfalls. Without systematic oversight, performance tracking, and contract enforcement, vendor relationships deteriorate into transactional exchanges rather than strategic partnerships. Companies that fail to actively manage these relationships face higher procurement costs, experience three times more supply chain disruptions, and struggle with inconsistent product quality that damages customer loyalty. Implementing even basic vendor management processes can transform these liabilities into competitive advantages that strengthen your bottom line and market position.

Selecting and onboarding vendors the right way

Companies spend significant time selecting and onboarding vendors, yet many still get it wrong. Despite this time investment, most companies experience vendor-related disruptions within the first year. Poor vetting and weak onboarding processes often lead to delays, compliance issues, and unexpected costs.

When you're choosing your vendor, price should not be the only deciding factor. A vendor with lower rates might cut corners, leading to product defects or missed deadlines. The long-term cost of fixing these mistakes often outweighs the initial savings.

Reliability, quality standards, scalability, and financial stability matter just as much as price. A vendor that struggles with delivery times, compliance, or customer service creates more problems than it solves. Businesses that choose vendors based on long-term value rather than cost alone avoid frequent disruptions and unexpected expenses.

How to vet vendors before signing a contract

Most procurement professionals believe poor vendor selection has resulted in financial losses or operational disruptions. A vendor might offer competitive pricing, but they can become a long-term liability if they lack reliability, compliance, or financial stability.

Check vendor track records: A vendor’s past performance speaks volumes about its reliability. Ask for references and case studies from businesses in your industry. Look at their track record for meeting deadlines, maintaining high-quality standards, and handling unexpected challenges.

Review financial health: A financially unstable vendor can cause major disruptions. Assess their credit history, outstanding debts, and financial statements. A vendor struggling to stay afloat may cut corners, delay deliveries, or even shut down unexpectedly.

Assess compliance risks: Regulatory violations can lead to legal trouble for your business. Ensure the vendor meets all industry-specific requirements, such as data security regulations, environmental standards, or labor laws. Non-compliance can result in fines, supply chain disruptions, and reputational damage.

Test response times: Slow communication can signal trouble. Before committing to a vendor, evaluate how quickly they respond to inquiries, provide quotes, and address concerns. Delayed responses now may turn into bigger problems later when issues arise.

Negotiate service-level agreements (SLAs): Clearly define expectations for performance, delivery times, quality standards, and dispute resolution. SLAs hold vendors accountable and provide a structured way to address problems if they occur. A vague contract increases the risk of misunderstandings and unmet expectations.

How to properly onboard your vendors

Even if you choose the right vendor, they may not perform as expected without a proper onboarding plan. Vendors operate on assumptions without clear expectations, leading to errors and inefficiencies.

Setting clear performance indicators from the start ensures vendors understand delivery timelines, quality standards, and service expectations. A designated vendor manager should oversee the process to streamline communication and prevent misalignment. Vendors also need clear documentation outlining internal workflows, approval processes, and compliance requirements to minimize operational missteps.

Implementing a trial phase to assess performance before committing fully is also a good idea. You can test out a vendor with a small order or project to make sure they meet your expectations without disrupting ongoing operations.

Manual vendor onboarding often creates bottlenecks, especially for growing businesses. Finance teams must set up vendor invoice details, assign expense categories, and ensure compliance with internal accounting rules. Ramp automates this process by allowing businesses to map vendor payments directly to their accounting systems, reducing manual data entry and ensuring transactions are correctly categorized from the start.

How to negotiate contracts that protect your business

Businesses spend an average of 30 hours and $6,900 in legal fees drafting and negotiating a single contract. Despite the upfront cost, a well-structured agreement offers better vendor risk managementx, offers effective vendor relationship management, and minimizes disputes.

Set clear deliverables and penalties

Your vendor contract should spell out exactly what the vendor needs to deliver when it’s due and the standards they must meet. Instead of using vague terms like “timely deliveries,” specify exact shipment dates and acceptable delays. If you are receiving products, include quality benchmarks, return policies, and inspection requirements.

Hold vendors accountable with penalties. If they miss deadlines or provide defective products, your contract should outline financial penalties, reduced orders, or additional service obligations. Without these protections, you could end up absorbing unnecessary costs while the vendor faces no consequences.

Use performance-based incentives

Vendors work harder when they have something to gain. Tie bonuses to key performance indicators (KPIs) like on-time deliveries, cost savings, or product quality improvements.

For example, if a vendor consistently meets or beats deadlines, you could offer early payment terms or increased order volume. These incentives encourage vendors to prioritize your business and maintain high performance.

Control costs with pricing protections

Without pricing safeguards, vendors can increase costs without warning. Your contract should include fixed pricing, volume discounts, and clear rules for price adjustments.

If you rely on raw materials, lock in pricing for a set period or cap annual increases. If price changes are necessary, base them on market indexes, not vendor discretion. This keeps costs predictable and prevents unexpected budget overruns.

Define exit terms and dispute resolution

You need a clear way out if a vendor underperforms. If they fail to meet deadlines, deliver poor-quality goods, or violate compliance rules, your contract should allow termination with reasonable notice.

Avoid costly legal battles with a dispute resolution clause. Instead of going straight to court, mediation or arbitration is required to resolve conflicts quickly and at a lower cost. This protects your business from drawn-out disputes and excessive legal fees.

Ensure compliance and liability protection

If a strategic vendor breaks the law, you could face the consequences. Your contract should specify which regulations they must follow and require proof of compliance, such as audit reports or certifications.

Protect yourself from vendor mistakes with liability clauses. If a vendor’s defective product leads to a recall, they should cover refunds, replacements, and any legal costs. Without these terms, you might be stuck paying for their failures.

Keeping vendor relationships strong beyond the contract

A contract sets the foundation, but a strong vendor relationship requires ongoing effort. Businesses that maintain close vendor ties see lower costs, faster service, and fewer disruptions.

Waiting until something goes wrong to check in with a vendor creates unnecessary friction. Regular communication builds trust and prevents small issues from turning into costly problems. Setting up scheduled reviews helps both sides stay aligned on expectations, performance, and upcoming needs. Vendors who feel included in strategic discussions are more likely to provide better service and offer cost-saving opportunities.

Vendors also prioritize clients who provide them with stability and growth. If you expect priority service and competitive pricing, vendors need a reason to invest in your business. Long-term agreements, larger order commitments, and collaborative planning encourage them to improve service levels and product quality. A strong long-term relationship benefits both parties, reducing supply chain risks and keeping operations smooth.

Providing structured feedback also strengthens long-term partnerships with vendors. After key deliveries or major projects, reviewing performance and discussing improvements creates opportunities for growth on both sides. Vendors who receive clear and constructive feedback are more likely to refine their processes, reduce errors, and offer better terms over time.

Handling vendor performance issues effectively

In most companies, procurement teams, operations managers, or vendor management specialists handle vendor performance issues. They track vendor performance, enforce vendor contract management terms, and step in when things go wrong. Owners or department heads often take on this responsibility in smaller businesses, balancing vendor relations with other daily operations.

When a vendor fails to meet expectations, the people in charge need to act fast. Delays, quality issues, and poor communication can quickly disrupt production, delay orders, or increase costs.

• Find the root cause: Don’t assume the vendor is entirely at fault. Check performance records and recent changes in demand. If deliveries are late, see if supply chain disruptions or miscommunication played a role. If quality has dropped, find out if the vendor changed materials, cut costs, or faced production problems.
• Be clear and direct about the issue: Vendors need specifics to fix problems. Instead of saying, “Your deliveries have been late,” show them actual delivery timelines and how delays have affected your operations. If quality is an issue, give them defect rates, comparisons to past orders, and the impact on your business. Sticking to facts keeps the conversation productive and solution-focused.
• Set expectations for improvement: If a vendor needs to improve, give them a clear plan with deadlines. If deliveries must be on time, set a target, such as reducing late shipments by 50% within a quarter. If product quality is the issue, define acceptable defect rates and require extra quality checks.
• Follow up and enforce consequences: Track the vendor’s progress. If they meet the agreed-upon improvements, acknowledge the effort and continue working together. If they do not, take action based on the contract. This could mean cutting order volume, renegotiating terms, or finding a new supplier. Without follow-through, vendors have little reason to change.
• Have a backup plan: Some vendors will not improve no matter how many chances they get. Waiting too long to replace them can put your business at risk. Keeping secondary vendors or alternative suppliers lined up ensures you can switch without major disruptions.

Building strong vendor relationships for long-term success

Strong vendor relationships drive long-term profitability. Businesses that actively manage their vendors cut procurement process costs and improve their efficiency. Poor vendor management, on the other hand, leads to delays, hidden costs, and supply chain disruptions that eat into profits.

Ignoring vendor relationships is a costly mistake. Companies that prioritize vendor management secure better pricing, reduce risk, and improve service quality. A well-structured approach ensures vendors stay accountable, deliver on time, and support your business as it grows. Vendors who see your company as a long-term business partner are more likely to offer competitive rates, exclusive deals, and higher service levels.

Vendor management is not just about selecting the right partners. It’s also about maintaining financial visibility and efficiency over time.

Ramp allows businesses to get a holistic view of all your vendors to get pricing recommendations, surface software usage trends, identify inactive users, and leverage data to reduce costs.