Vendor management involves overseeing and coordinating external suppliers that provide goods and services to a company. This process inherently carries several risks, primarily due to dependency on external entities. The primary risk is the potential for disruptions in the supply chain, which can arise from various factors such as financial instability of the vendor, geopolitical issues or natural disasters. These disruptions can lead to delays, increased costs and ultimately affect the overall operational efficiency of the company. Additionally, there's the risk of noncompliance with industry standards and regulations, which can expose the company to legal penalties and damage its reputation.

To mitigate these risks, companies should implement a robust vendor management strategy that includes thorough due diligence during the vendor selection process. This involves not only assessing the financial stability and track record of the vendor but also their compliance with relevant industry regulations and standards. Continuous monitoring is crucial; companies need to regularly review their vendors' performance and compliance to ensure that they meet contractual obligations and regulatory requirements. This proactive approach helps in identifying potential issues early and allows for timely interventions.

Moreover, companies should diversify their vendor base to avoid overreliance on a single supplier, which can be a critical vulnerability. Establishing strong relationships with multiple vendors can provide alternatives in case of significant disruptions, ensuring continuity of supply. Additionally, it's beneficial to develop contingency plans that outline alternative courses of action if a key vendor fails to deliver. These plans should be regularly updated and tested to ensure that they are effective in real-world scenarios. By taking these steps, companies can significantly reduce the risks associated with vendor management and maintain a resilient supply chain.

1. Vendor Management Capability Maturity Model (CMM)

This capability maturity model can be used to measure the maturity of an organization’s vendor management process and to assist its progress from the initial/ad-hoc state toward the optimized state. The capability maturity model describes a maturity curve on these capability levels: initial, repeatable, defined, managed and optimized. In this sample, an optimized organization utilizes formal training processes, contracts and sourcing processes. 

2. Vendor Database Management Policy 

Manage and maintain accurate, up-to-date information on vendors within your financial management system with this policy sample. Get best-practice procedures for registering new vendors, including the necessity of completing and submitting vendor registration packets and Form W-9s with our vendor database management policy, ensuring that all data entered is complete, accurate and current to facilitate proper payments and tax reporting.

3. Vendor Selection Policy 

Establish your organization’s vendor bidding guidelines and define requisition responsibilities with our Vendor Selection Policy, which is designed to ensure that expenditures are authorized and used for products or services with a valid business purpose. The document outlines the criteria and processes for vendor selection, emphasizing performance, quality, delivery timelines and negotiated price. It also mandates an evaluation of a vendor's capability for orders with significant value or long delivery timelines.

4. Vendor Review Audit Work Program

Improve your company’s vendor management process with the best-practice steps in this audit program sample. This audit program outlines a detailed assessment framework that includes governance reviews, organizational structure evaluations, insurance coverage verification, reliance on subcontractor analysis, human resources management (including training and onboarding processes), performance evaluations, termination procedures, and incentive compensation programs.

5. Vendor Payment Policy

Download this policy to initiate an ACH payment and handle requests for domestic and international wire transfers, domestic ACHs and foreign currency bank drafts. According to this policy, if the treasury payment authorization analyst identifies anomalies between the payment authorization report and the cash flow forecast, the analyst will determine the payment that requires blocking and notify the supervisor to block the payment. If the payment was not forecasted in the cash flow forecast, the analyst notifies the treasury forecast analyst it was not forecasted.

6. IT Vendor Management Capability Maturity Model (CMM)

Measure the maturity of an organization’s IT vendor management process and assist its progress from the initial/ad-hoc state toward the optimized state with this capability maturity model. The capability maturity model describes a maturity curve on these capability levels: initial, repeatable, defined, managed and optimized. In this sample, an optimized organization’s vendor management standards and criteria are generally established and communicated.

7. Vendor Master File Leading Practices

Measure and improve the vendor master process with this benchmarking tool. Best practices include analyzing additional duplicate payments identified during the initial review to determine the potential duplicate population, researching claims by pulling supporting information and following up with vendors, requesting and analyzing vendor statements sent to the top regular vendors, and tracking root causes for all recoveries to assist in implementing process changes to reduce financial leakage in the future.

8. Vendor Contract Library Management Policy

This policy establishes guidelines and procedures that must be followed with respect to retention, administration and amendment of vendor contracts in which a company is a party in the contract. This example applies to any and all current, active templates (“boilerplates”) maintained in the vendor contract library. It focuses on determination of vendor contract template changes, approvals, time frames for the review and approval process, vendor contract template maintenance, and monitoring vendor contract information repository.

9. Vendor Risk Management Policy

This sample policy contains guidelines and procedures employees should follow when overseeing third-party entities. This policy applies to all employees, contractors, vendors, business partners and anyone who acts as an agent of the company or any of its subsidiaries and is involved with the design, construction, maintenance, use, connection or removal of the company information, systems and networks. The requirements of this policy must be included in all contract negotiations that will or could affect the information security posture of the company.

10. Vendor Rebates Audit Work Program

This audit program sample includes steps that can be used to understand and review an organization’s vendor rebate process. Sample steps include: obtain and document an understanding of the accounting process and the vendor rebate program, document the methodology behind the inventory adjustments and assumptions used when booking the inventory adjustment, ask who the appropriate level of management is, and describe the policies and procedures that management has in place to monitor compliance with terms of the vendor contracts

Browse our Vendor Management topic page to see all of the vendor management tools and publications we have published.