Vendor Management

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 ANCHIT BEHL ANKIT MALIK ANURAG HURIA DEEPAK KHATTAR DIVYA DEWAN ROHIT MISHRA SHEEBA AGHA 1 |Page

NO 08 09 11 17 22 49 60

SIGNATURE

Vendor Management Production management Section – P1

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 2 |Page

Vendor Management Production management Section – P1

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 3 |Page

Vendor Management Production management Section – P1

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. •

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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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Vendor Management Production management Section – P1

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: 7 |Page

Vendor Management Production management Section – P1

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 Production management Section – P1

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 10 | P a g e

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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 14 | P a g e

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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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