5 Steps to Managing Vendors

Jun 01, 2004 9:30 PM  By

Not every vendor needs to be managed. This might sound like an absurdity, but there is some truth to it. Some vendor relationships can run on automatic pilot, whereas others require more. For instance, companies might monitor purveyors of office supplies for best prices and basic service requirements, but a deeper relationship is essential for strategic vendors such as retail goods suppliers, who must deliver to specs, on time, and at the right cost.

The most sophisticated approaches to vendor management start with an overarching strategy — what Pierre Mitchell, an analyst at AMR Research Inc. in Boston, calls “a portfolio-level approach that optimizes the supply base to a set of business goals and improves the performance of suppliers as a whole.”

The selection of strategic vendors should be tightly integrated with process management, according to Brent Habig, executive vice president for sales and consulting at Verticalnet, a Malvern, PA-based technology company.

“You want to partner with strategic suppliers to drive down joint costs,” Habig says. “You don’t want to wield a big stick and beat up vendors. You want to create relationships that allow both parties to work successfully in the long term.”

How do you do it? O+F spoke with leading retailers, vendors, and analysts, who offered the following recommendations to improve vendor management:

  1. SEGMENT YOUR SUPPLY BASE

    Not all vendors are created equal. “The most important thing is to figure out which vendors to manage and which not to,” says Habig.

    Differentiate vendors based on spend level, says AMR’s Mitchell, who claims that the classic 80/20 rule applies to vendor management. “Twenty percent of your suppliers are likely to represent 80% of your spend,” he asserts. “Reserve deep collaboration for those and go light with the others.”

    Deep collaboration could involve sharing demand forecasts and providing interactive tools for quotations and product design, according to Mitchell. For lighter forms of vendor management, think of automating basic ordering and notification processes — in other words, things that replace the telephone and fax machine.

  2. HELP YOUR ENTIRE SUPPLY BASE BECOME MORE EFFICIENT

    A retail firm seeking to manage the efficiency of its direct suppliers alone is doing only half a job. After all, those suppliers have their own suppliers, and if the sub-suppliers are performing sub-optimally, so will the retailer’s entire supply chain. That’s something the retailing giant IKEA learned when it studied its supply chain costs.

    IKEA designs the house-branded furniture it sells while outsourcing manufacturing. To control supply-chain costs, the company specifies and sources the components and raw materials used by its manufacturers. To increase operating flexibility and reduce costs, IKEA set up several competing, geographically based supply organizations. These trading offices receive centrally generated requirements and fulfill them from their separate supply networks.

    The company is now automating these innovative operations. “We want to provide our suppliers and sub-suppliers the opportunity to buy and sell raw material by using applications that improve their business efficiency,” says Matts Magnusson, a supply-chain project leader at the company’s headquarters in Amhult, Sweden.

    IKEA chose to implement a suite of Verticalnet products and is installing various functions in phases. Its initial focus, already implemented, is on automating quotation management. The second phase is set to include collaborative planning. A third phase is slated to implement auctions and reverse auctions and to provide supplier performance information and other data.

    IKEA’s notion of adding value to its vendors’ processes is a good one, according to Sue Welch, CEO of TradeStone Software, a developer of global sourcing and supply systems in Gloucester, MA. “Wherever possible, provide value to your vendors when you are asking them to adapt to your business needs and requirements,” she advises. “For instance, if you want electronic invoicing, offer incentives such as prompt payment or instantaneous audit that can auto-correct invoice discrepancies before submission.”

  3. LET YOUR VENDORS HELP YOU

    As Welch suggests, the vendor management process should be reciprocal. Only an 800-pound gorilla can get away with demanding that suppliers accommodate a laundry list of demands.

    Jeff English, global business process manager at Haworth Furniture, an office furniture manufacturer in Holland, MI, has found that customers often are surprised by how much Haworth can do to help them. “Sometimes customers come to us with vague goals and we sit down and show them our capabilities,” he says.

    Haworth stores customer-specific product, standards, and pricing information in a system it acquired from Comergent Technologies Inc. of Redwood City, CA. The Comergent system integrates with the popular Ariba procurement system so that a Haworth customer can seamlessly order products from a customer-specific catalog directly from the customer’s own system. Or, depending on customer preference, and whether the customer runs Ariba, Haworth can set up a stand-alone Web site from which the customer can place orders retail-style. The Comergent technology helps customers better visualize what they want by displaying drawings of workstations and other Haworth products.

    Comergent also enables Haworth to sink deeper into customer order creation, approval, and placement processes. “We’re able to accommodate our customers’ business processes, help streamline their administrative activities, and reduce the costs associated with processing an order,” says English.

  4. CHOOSE TECHNOLOGY TO FIT YOUR NEEDS

    The Children’s Place, a kids’ clothing retailer based in Seacaucus, NJ, sells merchandise, like IKEA, under its own brand, which it sources from outside manufacturers, many of them overseas. With nearly 700 stores in the United States and Canada, the company plans on adding 70 more this year.

    Ed DeMartino, the company’s chief technology officer, says he sought vendor management technology after identifying four key “pain points”: purchase order management, pipeline visibility, information collection, and financial invoicing. The TradeStone Software program chosen by The Children’s Place addresses those concerns, in part by having vendors and transportation providers input information through a Web browser.

    The TradeStone solution had a couple of other virtues. “Our suppliers can tap into our system and add a significant knowledge base without any training,” says DeMartino. “We feel that this will improve our relationships with our suppliers a great deal.”

    In the same vein, one reason Ocean State Job Lot, a chain of 37 off-price retail outlets based in North Kingstown, RI, chose TradeStone was for its ease of integration with the company’s existing JDA merchandising system. Ocean State has configured the integration so that once an order is confirmed in TradeStone, that information is uploaded to JDA, which prepares the order for receiving and payment.

    Like The Children’s Place, Ocean State must deal with scores of overseas suppliers, a challenge that TradeStone helps ameliorate.

    “Everything we did with them was manual,” explains CIO Hisham Aharon. “We would send purchase orders by e-mail or fax, and we had no place in our system where we could collaborate with the vendors over the purchase orders, quotes, and proposals.”

    Order confirmation and shipment tracking also presented difficulties. “We had to match up letters of credit with purchase orders, and calculate landed costs for each item,” Aharon says. Landed costs vary depending on how the merchandise is shipped.

    For Aharon, the best part of the technology he chose is the speed it brings to product ordering. “If one of our buyers wants to put out a request for quote, that RFQ will go out to multiple vendors immediately,” Aharon explains. “Overseas vendors can come back with offers right away. Doing these things manually can take days.”

  5. LISTEN TO YOUR VENDORS

    Companies may be wasting their energy if they put specific segments of their business out to bid. Instead, Verticalnet’s Habig suggests that better strategic results are achievable when companies let their vendors bid on the parts of their business that they want the most.

“We use the term ‘expressive bidding,’” he explains. “The idea is to let the vendor communicate what is important. It involves, for instance, selling to parts of the business most appealing to them.”

In the freight transportation area, the buyer’s requirements and the sellers’ networks and capacities need to be matched up and optimized. “You can’t look at the buyer’s requirements in isolation,” Habig says. “Expressive bidding can identify the economies that are unique to each transportation provider.”

In freight transportation, as in other areas of strategic vendor relationships, “purchase price is always an issue, but it is not always the prime priority,” says Habig. “Quality, consistency, and service are also critical.”

Peter A. Buxbaum writes about business and technology for such magazines as Fortune, Computerworld, and Information Week.