Vendor Management

Production management Section – P1

AN ASSIGNEMENT SUBMITTED ON VENDOR

MANAGEMENT
PRODUCTION MANAGEMENT

SUBMITTED TO -
Prof. A.S.Sharma

IIPM
IIPM TOWER, SATBARI,
CHANDAN HAULA, CHATTARPUR-BHATIMINES ROAD
NEW DELHI

NAME ROLL NO SIGNATURE

ANCHIT BEHL 08
ANKIT MALIK 09
ANURAG HURIA 11
DEEPAK KHATTAR 17
DIVYA DEWAN 22
ROHIT MISHRA 49
SHEEBA AGHA 60

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What is a Vendor?

A vendor, or a supplier, is a supply chain management term meaning anyone

who provides goods or services to a company. A vendor often manufactures
inventorial items, and sells those items to a customer. The term vendor
originally represented property vendors. However, today it means a supplier
of any good or service. A vendor, or a supplier, is a supply chain
management term that means anyone who provides goods or services to a
company. A vendor often manufactures inventorial items, and sells those
items to a customer.

Typically vendors are tracked in either a finance system or a warehouse

management system. Vendors are often managed with a vendor compliance
checklist or vendor quality audits. Purchase orders are usually used as a
contractual agreement with vendors to buy goods or services.

Vendors may or may not function as distributors of goods. They may or may
not function as manufacturers of goods. If vendors are also manufacturers,
they will build to stock rather than build to order.

Vendor is often a generic term, used for suppliers of industries from retail
sales to manufacturers to city organizations. Vendor generally applies only to
the immediate vendor, or the organization that is paid for the goods, rather
than to the original manufacturer or the organization performing the service
if it is different from the immediate vendor.

Vendor management
Vendor management is the discipline of establishing service, quality, cost,
and satisfaction goals and selecting and managing third party companies to
consistently meet these goals.

Vendor Management System

The term vendor originally represented property vendors. However, today it

means a supplier of any good or service. A vendor, or a supplier, is a supply
chain management term that means anyone who provides goods or services

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to a company. A vendor often manufactures inventorial items, and sells

those items to a customer.

Typically vendors are tracked in either a finance system or a warehouse

management system. Vendors are often managed with a vendor compliance
checklist or vendor quality audits. Purchase orders are usually used as a
contractual agreement with vendors to buy goods or services.

Vendors may or may not function as distributors of goods. They may or may
not function as manufacturers of goods. If vendors are also manufacturers,
they will build to stock rather than build to order.

Vendor is often a generic term, used for suppliers of industries from retail
sales to manufacturers to city organizations. Vendor generally applies only to
the immediate vendor, or the organization that is paid for the goods, rather
than to the original manufacturer or the organization performing the service
if it is different from the immediate vendor

History

VMS (Vendor Management Services) is a fairly recent advancement in

managing contingent labor spend. VMS is an evolution of the Master Service
Provider (MSP) / Vendor-On-Premise (VOP) concept, which became more
prevalent in the late-1980s to the mid-1990s when larger enterprises began
looking for ways to reduce outsourcing costs. An MSP or VOP was essentially
a master vendor who is responsible for on-site management of their
customer’s temporary help / contract worker needs. In keeping with the BPO
(Business Process Outsourcing) concept, the master vendor enters into
subcontractor agreements with approved staffing agencies.

It is noteworthy to mention that VMS really started to evolve around the time
Michael Hammer and James Champy's Reengineering the Corporation
became a bestseller. Large enterprises were looking for ways to compete in
the global economy. The main advantage for U.S. businesses during this time
period was that their purchasing departments were able to channel new
contract personnel requisitions to one source – the VOP – and, in turn, reduce
procurement costs by simplifying their payment process. In effect, they only
had to write a check to one vendor vis-à-vis hundreds of suppliers.

With the Internet came new ways of doing business, which included
electronic payment. According to Staffing Industry Analysts, Inc. the

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emergence of e-Business, B2B, E-Procurement et al was the catalyst that

began the VMS industry.

As businesses began to integrate this e-business concept, online auctions

such as Covisint began to appear. The value proposition was, they claimed,
that they could reduce spend for purchasing office suppliers, industrial
suppliers and other commodities by putting these purchase requests out for
bid via an online auction.

How vendor management works?

The beginning of vendor selection is the very essence of every organization

in today’s scenario.

• 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.

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Issues in Vendor Management

Managing the Individual Vendor Relationship

When an organization begins to outsource services, is must build an effective

and efficient process to manage the individual vendor relationship. This
process encompasses five critical phases –

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Phase I: Need Definition.

Outsourcing should never occur unless a clear need definition can be

developed with specific prioritized performance expectations (outcome and
activity). This phase is dependent upon early planning involvement between
the program leadership and procurement staff.

Phase II: Vendor Selection:

This phase involves the rigorous process of selecting optimal vendor‐

partners.

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The selection process includes development and prioritization of vendor

selection criteria and measures; a process to identify potential vendors;
assessment of the vendors’ capabilities against selection criteria; a thorough
risk assessment of all vendors; and selection of the optimal vendor.

Phase III: Relationship Development:

This phase creates criteria for linking the vendor to the agency. After a
vendor is selected, there must be the development of an operating
agreement between vendor and the organization that provides clear
operating expectations for performance, specified accountability, and the
alignment of the vendor organization to the host agency’s expectations and
operating procedures. Finally a data driven performance evaluation process
must be developed.

Phase III: Relationship Management:

This phase involves the on‐going relationship between management and

vendor as services are delivered. In this phase, trust and confidence are
earned. It is characterized by delivery of services, monitoring of results,
timely and effective communication of data against expectations, and the
early identification and resolution of gaps and opportunities between vendor
and agency.

Phase IV: Relationship Evaluation:

A formal assessment and evaluation of the vendor‐organization

relationship must occur. This phase includes the overall assessment of
vendor services provided; specification of unresolved performance gaps and
opportunities; development of action plans to address gaps and capitalize on
opportunities; and a re‐definition of the future relationship (revised
expectations, performance requirements and measurements).

Designing the Vendor Management System

Architecture
When an organization begins to outsource across multiple vendors, a vendor
management system must be established. Building an effective vendor
management system requires careful planning. The goal is to insure that
sound system components are in place and that they are effectively
integrated to produce optimal synergy. An effective vendor management
system has the following five key components:

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Vendor Management Strategy:

A vendor management strategy provides direction on how success will be

achieved. It includes the philosophy, purpose and beliefs about vendor
management as well as what the organization will and will not outsource.
Vendor groups are stratified and the optimal relationship with each group is
defined. Finally, clear expectations and performance measures are defined
and the capacity of the organization to manage vendors is established.

Vendor Management Structure

Structure is essential to insure that vendor management success is based on

sound infrastructure as opposed to the heroic efforts of individuals. Effective
structure includes a clear responsibility assignment matrix; specific and
linked performance measures; a clear vendor management process from the
need identification phase through the individual vendor performance
assessment phase; and appointment of a process owner.

Vendor Management Information Systems

Without systems, an organization cannot adequately communicate and

coordinate internally, thereby creating the likelihood of inconsistency.
Systems include definition and collection of the data required by involved
parties to assess and manage the total vendor relationship; and, a process
for sharing vendor performance data and decisions.

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Vendor Management Competencies

An organization that excels in vendor management builds strong vendor

management core competencies. At a minimum, these include decision‐
making; performance measurement and assessment; problem solving;
solution design; and negotiation skills.

Vendor Management Assessment

Finally, successful organizations regularly evaluate the performance of the

vendor management system in a data driven manner. Periodically the
vendor management architecture is assessed to define and resolve gaps and
opportunities.

The Successful Vendor Management System

When all the components of the architecture are integrated and operating
synergistically, the vendor management system functions in a cohesive
manner that leads to success.

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Implications to vendor management

Զ Determine if outsourcing is an appropriate methodology for delivery of

services and, if so, where outsourcing would provide an advantage.
Զ Assess the current organization’s ability to manage outsourcing,
including the cost of changes.
Զ Build strong capabilities (including defining performance
measurements and accountability for results (internally and
externally)).
Զ Insure the on‐going, systematic monitoring of vendor performance.
Զ Capitalize on vendor knowledge and expertise to improve services by
using their insights to identify and capitalize on opportunities.
Զ Raise both the vendor and organization performance bar regularly

So what is the job description of a vendor manager?

One of the nuances of vendor management is that not all roles are the
same. Some vendor managers have responsibility for operational day-to-day
tasks. Other vendor managers are responsible for outsourcing strategies
and governance. Some vendor management roles are responsible for
implementing new programs. Others vendor management roles are
responsible for training. This domain focus is an important area, but it’s not
the only area to include in a job description.

The categories below address the major areas of any vendor management
job description:

Contract Management –

One of the prime responsibilities of any vendor manager is to manage the

vendor to the responsibilities outlined in the contract and statement of work.
At times, vendor managers will be responsible for authoring contract
documents, including service level exhibits, statements of work, and
examples. If you remember your college entrance exam, you’ll surely realize
that reading comprehension is a difficult skill - and vendor managers need to

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be excellent at this skill. Furthermore, vendor managers need to be well

versed in key terminology associated with contracts and understand how
they interrelated. Examples include indemnification, intellectual property,
force majeure, and amendments/exhibits/SOWs. Finally, good vendor
managers understand that they must manage the vendor to the contract and
be creative when contracts don’t address certain issues (no contract covers
every possible event). You do not need a loose cannon in a vendor
management role.

Financial and Quantitative Analysis –

Fundamentally, vendors are suppliers of services and products.

Understanding the financial rationale for “make versus buy” decisions and
extrapolating internal and vendor costs to develop this analysis is a required
responsibility of a vendor manager. While it may not seem relevant for a
vendor manager responsible for training, even this vendor manager must
understand the financial repercussions of effective training on vendor
operations. Furthermore, vendor performance is fundamentally a
measurable service. Measuring the quality and timeliness of delivery, as well
as understanding core operations management variables and calculations is
essential to ensuring the vendor is effectively delivering services.

Relationship Management –

While much of a vendor managers’ responsibility is related to controlling and

regulating vendor performance, any client should strive to be a vendor’s
most valuable customer. This may include early adoption of vendor service
offerings, co-development of functionality and operations, or simply being an
advocate of the vendor internally for the company. This level of relationship
management with external partners is a difficult skill to develop.
Salespeople are excellent at this skill, but most operations managers are
unfamiliar with the importance of developing a deep, strategic relationship
with a vendor. This is a relationship that the client can leverage when
needed most.

Strategic/Big Picture Thinking –

In a normal operation, your operation management or project management

personnel have a detailed understanding of all aspects of the business
because your employees are performing the service. When a vendor
performs the services, it is easy to loose sight of the details that drive
success. An effective vendor manager understands how the interrelationship
of processes, technologies, and people create results. An extremely
effective vendor manager understands how to create mutually beneficial

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opportunities for his/her company and the vendor using this information. A
strategic, broad thinker is essential in a vendor management environment.

Team Leadership Experience –

While a vendor management role could possibly be an individual

contributor, understanding the vendor’s operation requires previous
leadership experience. Understanding personnel management, managing
upwards, managing downwards, and attracting talent is fundamental to
operations management. While the role of a vendor manager may have no
direct reports, the vendor manager is in fact frequently indirectly managing
teams of several hundred vendor employees. The mistake many companies
make is asking business analysts to fulfill vendor management roles.
Ultimately, these companies have difficulty with consistent vendor
performance because the vendor manager doesn’t have the experience to
manage hundreds of vendor personnel.

Domain Expertise –

This area is specific to the vendor management organization - if a vendor

manager is expected to perform a particular task, such as quality
management, RFP development/vendor selection, or service level
measurement, the vendor manager needs experience in this skill. Most
importantly, since vendor managers rarely have direct reports, the vendor
manager needs to have high competencies in the area. Time and time
again, we see companies ask project managers to take on vendor
management responsibilities. The project management discipline is
significantly different from running day-to-day operations, and operations run
as projects frequently lack the discipline to drive continuous improvement
initiatives.

Finally, there is the question of seniority of vendor management positions. It

goes without saying that vendor management done well drives performance
for the company. Given the impact of failure, which could include contract
terminations, vendor abandonment, and poor customer satisfaction, it is not
a place for rookies. While having junior personnel around to take on
reporting responsibilities is the norm, placing anyone less than a true,
experienced manager in the role of a vendor manager could have dire
consequences. In fact, companies consistently under invest in vendor
management personnel, either in terms of quality, development, or
quantities. These companies are the ones that have challenges created by
their own decisions

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Four steps are necessary to appropriately outsource or contract for

goods or services:

Step One: Risk Analysis

Fundamentally, proper vendor management is nothing more or less than risk

management. This step requires the financial institution to identify the
importance of the function to the organization, the nature of the activities
the vendor will perform, and the inherent riskiness of the activity. The more
risky the activity, the more important the need is for diligence in selection, in
contracting, and in supervision and monitoring. Of course, for regulatory
purposes, the process of risk analysis must be carefully documented.

To properly assess the importance of the function to the financial institution,

it must first analyze how the outsourced function meets the its business
needs and strategic objectives.

Step Two: Due Diligence in Vendor Selection

The intensity of due diligence required in selecting a vendor will depend on

the results of the risk analysis the financial institution completed in deciding
to contract with a vendor to provide goods or services. Due diligence
requires a reasonable inquiry into a vendor's ability to operationally meet the
requirements for the proposed service and an inquiry into the vendor's
financial ability to deliver on its promise.

Assessing staffing requires questions such as:

• What is the quality and experience of the staff?

• Are there sufficient employees to meet the financial institution's
expectations for performance?
• Are the managers competent and familiar with the industry?
• Are employees and management well trained?
• Does the staff turn over quickly or is it stable?

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Assessing industry expertise requires questions such as:

• How long has the vendor been involved in providing this service?
• Does the vendor provide this service to other financial institutions?
• Are there user groups or references that the bank can consult
concerning quality?
• How do these references assess the quality of service performed by
the vendor?
• Does the vendor rely on third parties or partners to provide the
services?
• Does the vendor have information concerning the expertise of these
third parties?
• What is the reputation of the business?
• Has the vendor been involved in litigation that casts doubt on its ability
to provide the services in the manner required by the bank?
• Is the vendor aware of any bank regulatory requirements and other
legal requirements relating to its goods or services?

If adequate financial information is not available for the vendor, the lack of
information should be considered a risk in the assessment of the vendor. In
addition to financial information, the existence and adequacy of insurance
coverage should also be questioned. Does the vendor have fidelity bond
coverage, liability coverage, fire, data loss, document protection, and other
coverage in amounts deemed adequate for the services the vendor is to
perform? Will the bank's contract with the vendor require the vendor to
make additional investments in personnel or equipment? Can the vendor
easily absorb any such additional investment?

Step Three: Documenting the Vendor Relationship

Contract Issues

A strong contract with a significant vendor is essential to properly managing

the relationship. Even relationships with vendors that provide low-risk
services can, and often should, be defined in simple form contracts.

All contracts should be in writing and, to the extent applicable, should cover
expectations and responsibilities, the scope of work and fees, type and
frequency of reporting on the status of work involved, process for changing
scope of work, ownership of any work product, an acknowledgement that the
vendor is subject to regulatory review, privacy and information security, a
process for ongoing monitoring, and supervision and dispute resolution.
Legal counsel should review all significant contracts.

A common problem with many vendor contracts is that the expectations and
responsibilities of the vendor and the financial institution are not adequately

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communicated. When problems develop, resolution becomes very difficult,

as each party insists that the other is responsible.

The scope of services to be performed should be carefully addressed in the

contract. Scope should, at a minimum, include:

• Services to be performed by the vendor

• Responsibilities of the financial institution
• Timeframes
• Implementation activities
• Details concerning fees
• The financial institution's responsibility for expenses incurred by the
vendor

Performance standards should likewise be included in the contract. What

tolerance does the financial institution have for errors?

If the contract is a technology contract, a service level agreement (SLA) is

essential. An SLA will establish the performance standard and service quality
expected under the agreement. For each service covered by the SLA, it
should provide for an acceptable range of service quality, a definition of what
is being measured, a formula for calculating the measurement, and penalties
(or credits) for meeting or exceeding targets.

Vendor contracts must also include references to the financial institution's

right to monitor the performance and condition of the vendor. It should
require the vendor to submit appropriate reports, including financial reports,
audit reports, and internal control reports, depending on the risk assessment
for the subject of the contract.

The term of the contract is another essential factor. The regulators are
increasingly clear that they are concerned about the use of long-term
contracts, especially in technology agreements. Technology changes rapidly
and financial institutions need the flexibility to change providers if the
chosen vendor fails to keep up with current practices.

Step Four: Ongoing Supervision and Monitoring of

Vendors

A financial institution must provide in its contracts for the ability to monitor
vendors during the term of the contract. To adequately supervise a vendor,
an officer must review and be accountable for the performance of the
vendor. How much supervision is required is, of course, dependent on the
institution's assessment of the risk of the particular service being provided.

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The staff assigned to oversee each vendor should have the necessary
expertise to do so appropriately.

Monitoring and supervision should include ongoing (at least annual) review
of the vendor's financial condition and insurance coverage, including a
verification that the insurance coverages represented to the bank are in
force. The vendor's policies relating to internal controls and security should
be reviewed and some method of determining whether the vendor is
following such controls should be developed.

Review and monitoring also requires an assessment of whether the third

party has provided services in accordance with representations made in the
contract and in accordance with applicable regulations and laws. The
vendor's contingency plans should be reviewed to be certain that they
remain in place and have been adequately tested.

Advantages

• Streamlined requisition approval workflow

• Reduced time-to-fill cycle times
• Bill rate standardization / management
• Optimization of supplier base
• Consolidated invoicing
• Improved security and asset management
• Availability of vendor performance metrics
• Visibility and cost control over maverick spend
• 10-20% reduction in contingent labor spend

Conclusion

Vendor management is complex and indeed cumbersome and annoying.

Properly implemented, however, it can save the financial institution money,
loss of reputation, failing to provide core services in a quality manner, and
regulatory headaches. Today vendor management is improving everyday
and the context in which it is growing is absolutely amazing. The future of
this stream is vast and development opportunities for an organized vendor
management system are high.

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