Definition of Vendor Management

Executives and outsourcing vendors alike are constantly evaluating what vendor management is.  Here is our quick definition of vendor management: Vendor management is the discipline of establishing service, quality, cost, and satifaction 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.

Note that vendor management is not the same as operations management, although it is remarkably similar.  In an outsourcing relationship, vendor managers must understand the drivers of the relationship in order to ensure the vendor is successful.  Vendor managers are not empowered to perform all aspects of the outsourced operation.  Rather, they must influence the vendor to perform.  This level of influence is different from managing employees because of the economic differences in the relationship: a company typically represents 100% of an employee’s income, but rarely represents even 5% of a company’s revenues.  More to the point, most outsourcing contracts are priced by vendors in a way that even if the vendor paid the maximum nonperformance penalties they are likely to still be profitable.  So, the conundrum vendor managers face is how to influence profitable vendors to meet performance objectives when reaching these levels are likely to be less profitable in the near term….


Related posts:

  1. Human Resources Outsourcing: Where’s the Value?
  2. Vendor Management Job Descriptions
  3. Vendor Management: Quarterly Review Methodology
  4. Impact of Foreign Currency Exchange Rates on Outsourcing
  5. Vendor Management Organizations Are a Bad Design


6 Responses to “Definition of Vendor Management”
  1. Stephen Guth says:

    The definition of “vendor management” can be taken a step further with the following description of the organizational structure, the “Vendor Management Office,” that is responsible for the vendor management function:

    A Vendor Management Office is a strategically-focused purchasing organization comprised of highly-skilled business advisors who are entrusted with strategic sourcing and management of vendor relationships such that investments in key commodities are maximized to the fullest extent and risk to the business minimized.

    Stephen R. Guth, Esq.

  2. tony says:

    I think Stephen definitely hits on a key area of competency within a vendor management team. However, I’d avoid narrowing-down a VMO to a strategic sourcing organization. The ins and outs of managing the operations of a call center, back office, and transaction management team typically go beyond the skills and experience of a strategic sourcing professional. With that said, there is no doubt that a highly experienced strategic sourcing team and strong negotiators can add significant value to a VMO, but they may be best left within their respective IT procurement or enterprise strategic sourcing teams where their talents can be assets to the entire company – including vendor managers.

  3. Gopal Purdhani says:

    Vendor management is a subject that has not been talked about much, atleast in INdia. It is very strange that this highly signicant and major part of subject, business mangemnet had nat been accorded due attention; particularly with view of being an effective partener incost-effectiveness. I, therefore feel that establshing a VMO in any business enterprize is necessary to cooerdinate the in-puts from departments like materials , Legal and marketing could be integrated and function under V. P. (Marketing)

  4. Gopal Purdhani says:

    Vendor’s management relates to the relationship between the seller and his clients for the promotion of sustained business process. There can not be a buyer if there is no seller. The seller comes first because he identifies the need of the buyer..
    At presnt the 80 % of the sale business is carried out in the unorganized sector. If this huge force is brought under proper management ethics then the techniques of business manageemnt practices would be more result oriented and meaningful.
    Lat us build a society that talks of vendors management.

    Gopal Purdhani

  5. tony says:

    I wish I could agree with Gopal, but I don’t. In free markets, demand shapes the market. While there is little doubt that suppliers’ provide the services, they wouldn’t be in business if they didn’t meet the needs of the customer.

    In the outsourcing space, as in all spaces, expecting ethics from sales people is hard to believe. Vendors provide predefined SOWs, contracts, and business models to clients that are, by design, not favorable to clients.

    I earnestly believe that vendors operationally want to be successful, but without being managed, they don’t succeed and will frequently fail – just like any undermanaged person, department, or organization. That’s not to say vendors provide subpar services – its that the vendors cannot understand their clients’ business, including changes, sufficiently to provide services self-sufficiently. Clients must manage vendors to be successful.

  6. Gopal Purdhani says:

    Tony is right when limiting the thought process to free marketing.
    In global context where most countries are under-developed and developing, we must consider business being carried out in those and with those countries that is actually three fourth of total commercial transactions. In fact the management refers to the managing of the transactions in totality.
    Out sourcing is done with the main purpose of concentrating on the real and main objective. We must resort to out sourcing all supporting activities.
    Main objectives are to be accorded main efforts and involve top management.

    Gopal Purdhani

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