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Before we can get into specifics about vendor management software (VMS) and the role it plays along the supply chain, we first need to understand some of the terminology commonly used to describe and talk about this type of software.
For starters, the word "vendor" can mean a lot of different things depending on the market. Broadly speaking, a vendor is any person or entity that sells goods or services. A supply chain vendor refers to a very specific instance. Supply chain vendors are not your employees—they are contracted, third-party organizations that manufacture and/or sell stock to you.
Another phrase you're going to see a lot when researching vendor management software is third-party risk management. This language has come about fairly recently as a result of federal regulations and guidance regarding the liability a company assumes when contracting a third-party vendor. This is becoming more important as issues of cybersecurity and stolen data are increasingly present in the public mind.
Vendor management plays a significant role in a well-run supply chain, and there's a great deal to consider when exploring this type of software.
In this buyer's guide, we'll explain the fundamentals of vendor management software along with what you need to know as a small business when making your software selection.
Here's what we'll cover:
What Is Vendor Management Software?
One way to think of vendor management software is as a much more robust version of supplier relationship management (SRM) tools. All the things SRM software can do—performance and risk assessment, sourcing, compliance etc.—VMS can also do. But it also provides additional important features. We'll get into specific features later, but for now, let's talk about the four biggest roles vendor management systems perform.
It's a channel of communication between managers and vendors. Having one centralized location where every party involved in a transaction can discuss expectations, setbacks and the task at hand is vital to getting a job done correctly. VMS provides that central platform.
It's a one-stop shop for task management. Basically, it's project management for vendors. It can handle assigning, tracking, coordinating and collaborating.
It's a way to pay the bills. Because third-party operators are not technically employed by the companies they're creating products for or selling products to, it can be difficult to keep track of contracts, payments, hours and other expenses. VMS automates a lot of that work.
It mitigates risk. VMS plays a crucial role in assessing any risks your company may be taking on by working with certain vendors. Most vendor management and risk solutions do this by requiring any vendors you're considering working with to complete detailed questionnaires that identify any potential issues with the vendor's services. For instance, vendors might have to explain what data they'll require access to and how exactly they'll protect that data from exposure.
Common Functionality of Vendor Management Software
Vendor management tools differ depending on your business, and a lot of the systems available can be customized and tailored to do exactly what you need them to. Above all, the goal of VMS is to simplify and streamline every aspect of working with outside vendors. To achieve this, most systems will offer the following capabilities:
|Sourcing and selecting vendors||Identify potential vendors, assess risks, obtain quotes and ultimately determine which one you want to work with.|
|Engaging and communicating with vendors||Initiate contract negotiations, come to terms and promote an engaged client-vendor relationship.|
|Onboarding vendors and ensuring compliance||Get new vendors up to speed on your business's practices and policies while also checking every box for federal and state regulations that require compliance.|
|Paying vendors||Track billable hours, payments made and owed and any other billing information necessary for accurately completing vendor transactions.|
|Evaluating vendors||Document how well or how poorly vendors performed once the transaction or task is done so that you can 1) address any failure to meet expectations and 2) identify both subpar and exemplary vendors.|
Other features of VMS include options such as budgeting, invoice/receipt creation and vendor portals.
Supplier home page in Ivalua's Supplier Management product
How Are Vendor Management Systems Priced?
Pricing and packaging models for VMS vary quite a bit. By and large, your best option will be to go directly to the source and obtain a price quote, as that's the only way many of these software providers offer to explore their costs.
Still, there are a few out there who make that information available on their websites. For the most part, these systems are cloud-based or SaaS platforms that require subscription payments either monthly or yearly. Costs can range from nothing at all for basic packages to as much as $2,000 per month per user.
Key Considerations When Shopping for Vendor Management Software
You may wonder whether VMS justifies the cost. That depends on your size and current vendor relationships. If you haven't had any problems connecting your small business with reliable, trustworthy suppliers and working with them through things such as payments and communication, you may not need this software right now. That said, if your business is likely to scale, you'll need a system that can manage added complexity.
Supply chain businesses of all sizes can benefit from the features that VMS provides. These systems can improve the following business processes in particular:
- Purchase orders, requisitions or procurement
- Third-party billing and invoicing
- Security and risk assessment
Here are some key questions you should consider when choosing a software vendor:
How difficult will it be to deploy, integrate and use this software?
Will it require the purchase of extra equipment? Will it integrate with existing software you're already using, such as warehouse management and accounting systems? What kind of training will be needed to help you and your employees master this software?
How will this product impact my existing vendors?
Are they capable or willing to use this product? Will this improve communication between them and you? Will this disrupt their way of doing things?
You don't have to have all the answers right now, but it can be useful to ask yourself these critical questions when evaluating different vendor management systems. And if you're still having trouble, you can always reach out to our expert advisors at (844) 687-6771 for a quick and easy consultation to identify products that meet your requirements.