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….