Ultimate guide to vendor management system

Vendor management systems are cloud-based software authentically designed to assist businesses in taking care of the end-to-end vendor management processes from the commencing contract to the final business partnership. 

Selecting the right vendor management system can help you organize and simplify the process. It is an effective system that is known for increasing productivity, managing labor costs, improving vendor performance, speeding up the process of vendor onboarding, reducing security risks, and untangling many other laborious tasks.

What is vendor management?

Vendor management is an interwoven, multi-step process used to organize all the aspects of initiating and preserving relationships with vendors. Vendors are facilitators of goods and services which a company requires for its functioning.

The buyer or purchasing company (your business) will be required to maintain documents, contracts, and other business partnership information. This process also includes exploring and scrutinizing appropriate vendors, examining the quality of work, supervising and maintaining performance and standards, and establishing safe payment methods.

Vendor management

What are the different stages of vendor relationship management?

1. Identification of potential vendors

The first step to building relationships with your vendors is to identify which of these vendors you want to work together with.

Based on your business needs, the procurement team will list potential vendors that may fit the bill according to what you want to order. It’s easier to narrow down your selection this way.

2. Vendor selection

Once you’ve narrowed down the potential vendors, you’ll want to weigh them out against each other so that you can select the best ones for your purchases.

It’s important that you do thorough research on these vendors so that you pick the right ones. Try getting a price estimate with each vendor if you can.

Related read: Guide on vendor selection criteria

3. Contract negotiation

After you pick a particular vendor, you want to enter the contract negotiation phase to get the best price and terms for your purchases.

Make sure that you familiarize yourself with the vendor and maintain a good relationship as the negotiations happen. Try to find the best solution for all parties involved.

4. Vendor onboarding

A negotiation will need to be signed off, as the contract will be the basis of your future transactions. Once you have agreed on the terms, onboard the vendor onto your vendor management software to make it easier to create future purchase orders and receive invoices. You can manage all orders and payments there.

5. Performance monitoring

Just because you have onboarded your vendor onto the vendor management system, that doesn’t mean the work is done.

You’ll want to monitor how the procurement and accounts payable teams use the software. This helps you identify any bottlenecks in the vendor relationship management process.

Make sure that you stay open to feedback.

6. Continuous improvement

As you keep a close eye on your vendor management system, you’ll be able to devise plans to continuously make improvements to your processes.

Make sure that you perform regular reviews and evaluations.

Work closely with your system provider to see what can be improved through new features and customization options. 

Why is vendor management important?

Vendors for any company are an essential element for the advancement and success of your business. They ensure the growth and improvement of the revenue and profit levels of your company. Despite all this, you may often fail to comprehend the significance and gravity of constructively managing your vendor relationship. Vendor Management, in general, is a lesser-known and scarcely understood business strategy, and this lack of complete knowledge can be an enormous setback for your company. 

In today’s scenario, obtaining goods and services is much more than just acquisition; it has become an integral segment of the overall business strategy of any business. Keeping the mind the goal of acquiring the optimum value for your money, a strategic and incremental perspective needs to be adopted for vendor management.

Diminish risks

Vendor relationship management can reduce the risks associated with the vendor's performance, costs, and operations. Any unforeseen compliance and visibility issues can also be deciphered easily by verifying the supplier’s information and specifics.

Reduce costs

All the invisible costs can be effortlessly controlled with the increased visibility that comes with prudential vendor management. Moreover, with the enhanced efficiency of vendor management processes, you create a stronger vendor relationship which in turn gives you the space to negotiate better.

Augment performance

After activating your supplier in the vendor management system, you can track the performance and quality of work of your vendor in terms of your contract. Along with this, all the data collected from the performance tracking can indicate to you any problems or challenges which may appear in the future, through which you get a head start to make the necessary improvements.

Improve administration

Administrative competencies improve significantly with a proper vendor management system. Maintaining all the vendor information in a single place can colossally multiply your company’s administrative productivity. Vendor Management can protect you from loss of contracts, reduce labor costs and errors and eliminate duplication of data. An appropriate and fighting vendor management would surely impress your vendors. 

Fabricate strong vendor relationships

Discovering good vendors is a sweating job. Once you find excellent vendors and initiate a relationship with them, make sure to do everything in your power to keep the engagement solid and build loyalty. A potent vendor management system can assist you in achieving this, which will be an immense benefit for your business because you would have great vendors in your supply chain.

Preserve your brand

A brand name and reputation hold a good deal of value in the marketplace. You under no circumstance want to destroy or strain your company’s brand name by connecting with unethical and unprofessional vendors. A vendor management system empowers you with all the valuable information such as market reputation and standards in regards to your vendor, which diminishes the risk of serious damage to brand name and reputation.

Boost onboarding speed

The whole vendor onboarding process seriously requires a lot of time and money investment. However, with the help of a vendor management system, this process becomes easy as pie. This is because all the essential data of the vendor like back details, capacity details, performance analysis can be procured easily, and once you input it into the system, the process is automated. The faster you onboard vendors, the quicker you will be able to start working with them.

Challenges of managing vendor payments


It is imperative to set standards before dealing with vendors to save time and money. You may not always be satisfied with a vendor's performance. It is very important to select the right vendor from a range of vendors who meet your company's standards and requirements while also providing excellent service.

In the meantime, standardization poses some challenges due to varying payment terms and dates, making it a challenge to manage contracts.

Implementing risk assessment of vendor management can increase cost savings by establishing accountability with your vendors.

Data storage

It is important to have a vendor data storage solution in place as your organization grows. Considering that you may be dealing with multiple vendors for multiple projects at the same time without a vendor management system, storing and retrieving data might prove to be challenging. In the absence of a repository that allows vendors to be managed centrally, it is difficult to access, store, and collaborate on numerous vendors at the same time.

In addition to distinctness, integrated data makes efficient management very easy. It doesn't matter if you're auditing compliance, optimizing resource allocation, or improving enterprise risk management.

Data security

For any business, data is the most valuable resource. Having a strong cybersecurity strategy in the vendor management system provides a differentiated level of protection for a company's information assets, providing the most important data with the best protection possible. Otherwise, sensitive information like payment details can be used for wrong purposes by hackers or unauthorized users.

Payment terms

In the absence of standardizing your relationship management with vendors, you may find yourself working with suppliers who do not match your business needs or putting yourself at risk for cyber-attacks. The difficulty of negotiating the terms and making sure payments are always made on time is the biggest challenge, particularly when you are dealing with several vendors at the same time.

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What is a vendor management system?

A vendor management system, often referred to as a VMS, is a platform or system that helps you manage the complex multi-step vendor management process.

You’ll be able to perform all related tasks on a single platform and automate manual work.

With features to help you onboard suppliers, store vendor information, monitor performance, process invoices, and many more, it will allow you to manage vendors hassle-free.

How does a vendor management system work?

1. Vendor registration and onboarding

Vendor registration and onboarding are key, as this information will serve as the basis of your entire vendor management process.

You’ll need to enter your vendor information and fill out some required fields to onboard them.

You may also get access to a self-service portal, which allows vendors to register their information themselves.

2. Automated workflows

All vendor management systems that are worth your while will have automation features to help you with processes such as approvals, purchase requisitions, and order fulfillment.

With an automated approval workflow, for example, you can route purchase requisitions through a workflow and get approvers to review and approve each request easily.

3. Performance tracking and monitoring

You’ll be able to set up key performance indicators for your vendor performances on a VMS. These should be predefined, which will then allow the system to automatically track and monitor vendor performance.

If anything in particular isn’t performing according to your KPIs, you can also opt to be notified.

4. Contract management

The great thing about a vendor management system is that you can view and manage all your contracts on a single platform.

Once a contract has been agreed on between you and a particular vendor, information about the contract terms should be uploaded onto your system.

Should you want to negotiate terms, it’s easy to do so.

5. Compliance management

Having contracts to refer to easily accessible to you is helpful in compliance management. You can ensure that every transaction complies with the contract terms.

Not only that, but you can also view industry and legal requirements and match up your vendors against these regulations. It allows you to mitigate risks more easily. 

6. Reporting and analytics

You’ll get access to a number of reporting tools and analytics features through your vendor management software. This allows you to generate reports and automatically analyze patterns in your vendor performance.

You won’t have to spend a lot of time manually laying out your data and can instead get it done in just a few clicks. 

7. Integration with existing systems

Most modern vendor management systems offer integration capabilities with other systems that a business may already be using.

Integration with accounting platforms, for example, is a popular feature to have.

By setting up integrations, you’ll be able to directly sync data between platforms with just one click. Setting up may require you to fill in several fields. 

8. Invoice payment and processing

The good thing about using a VMS is that it does more than just collect vendor and contract data. You can also process your invoices on the same platform, helping you streamline this process.

Purchase orders, delivery receipts, and invoices can be automatically captured and matched. Approving and paying vendors are effortless. 

9. Continuous improvement

You will get plenty of customization options with a vendor management system, which you want to take advantage of whenever possible.

As your business grows, your VMS should be able to grow alongside it.

Make sure that you make tweaks and continuous improvements using the features available to you.

Essential features to consider in a vendor management system

A vendor management system (VMS) is a software system designed to help companies handle their vendor relationships, from initial contact through establishing a business relationship and closing a deal.

Using the right vendor management system helps you optimize your supplier relationship, which is necessary to the efficiency of any procurement team.

1. Vendor onboarding

Using the system should be easy and fast so that you can access vendor catalogs, sift through the information, see vendor information in multiple languages, and easily register vendors.

2. Vendor payouts

The system must provide a smooth functioning interface for payments, allowing all payments to be made through a single entity, standardizing processes, streamlining and optimizing procedures, and lowering costs.

3. Simple and smooth invoice processing

For vendor management, the billing process is an essential part of sustaining the smooth flow of an operation. Vendor payments can be made with better efficiency and accuracy through simple invoice management.

The vendor management system ensures a streamlined billing process as well as improved collection procedures.

4. Vendor-related information database

A database of all relevant vendors and vendor-related information should be built after the business goals have been determined.

A vendor management system makes it easily accessible and efficient for the business units to match their needs with the most suitable vendors, as well as the categorization of vendors based on their type, making cross-vendor comparisons more straightforward.

5. Vendor screening

Providing supplier data, such as business reports, financial information, and credit risk information by retrieving and verifying it through the system is also an integral part of vendor management systems.

6. Automated invoice processing

With the help of vendor invoice management, the processing time and invoice processing errors are reduced significantly, along with an increase in employee productivity.

7. Multi-level approvals for vendor payments

Accounts payable automation system create a pathway to design a chain of custom approval making it more efficient than the traditional approval methods, which are time-consuming and often confusing for the employees to follow the chain of command.

8. B2B payments

In addition to its payments offerings, systems also provide payment solutions for various vendor-associated businesses and their underlying clients.

Businesses can receive and process local and cross-border B2B payments efficiently and more economically with vendor management systems.

Benefits of having a vendor management system


Cost saving and improved efficiency

Most vendor management systems come with a cost as part of their pricing plans, but in the long run, using one for your business will help you save money.

Processes that would typically take you hours can be done within minutes with a VMS. Improved efficiency means that you spend less on time and labor.


Enhanced vendor relationship

Collaborating with your vendors is easier when you have a vendor management system.

Everything from purchase orders to invoice payments can be easily done on a single platform, eliminating communication delays and miscommunication.


Improved compliance and risk management

Many VMS providers boast built-in compliance features to help you with it. Taxes, for example, can be automatically calculated when you send your vendor a payment.

Having your contracts, purchase orders, and invoices all in one place also helps you improve compliance and makes risk management an easier task to do.


Data-driven decision making

It’s difficult for business owners and executives to make good decisions without the right information to back up their choices. This is why it’s important to have the right set of data to refer to when making decisions.

You’ll be able to easily get insights into your vendors, suppliers, and purchases with a VMS.


Real-time insights into vendor performance

Instead of having to manually review each vendor one by one, a vendor management system can give you real-time insights into all vendor performances in just a few clicks.

You have a centralized platform where you can easily track and review all your vendors, contracts, and orders. You can even compare different vendors with each other.


Data security

Knowing what is vendor management system can help you improve your data security. While trusting a third-party provider may be daunting, a reputable one will allow you to store data on a safe and encrypted remote server, reducing the risk of stolen or compromised data.

You also won’t have to jump through hoops to organize your data storage.


Audit trail

Audits are notoriously difficult to prepare for, especially if you’re not already building your audit trail ahead of time.

However, centralizing your vendor data and information with vendor management software allows you to easily build an audit trail. You can find and lay out all vendor and purchase information within a period quickly.


Customer satisfaction

As its name suggests, a vendor management system helps you collaborate better with vendors, but using one will also indirectly boost customer satisfaction and improve the way you do business with your customers.

When your suppliers are well-managed, you can ensure that daily operations will go smoothly, thus helping you fulfill customer demands. 

Looking for a solution to solve your vendor management-related issues?

Factors to consider when choosing a vendor management system

1. User-friendliness of the system

When first learning about what is vendor management system, you may be most impressed by platforms that have the most complex and advanced features.

However, keep in mind that it is also important to consider how user-friendly the system is. User-friendliness ensures ease of use once the system has been implemented in your organization. It helps employees familiarize themselves faster.

2. Integration capabilities

Ideally, your vendor management system should be integrated with other systems that your business uses, as this will help you maintain accuracy across multiple platforms and avoid data silos.

When considering a provider, ask what integration capabilities are available to you. You want to pick a platform that can integrate with what you already have or are planning to use.

3. Customization options

Your business will have its own requirements and vendor management processes, which may differ from another business.

When researching what is the best vendor management software for your business, you want to make sure that the provider offers enough customization options so that you can tailor the features to fit your processes.

This is also helpful when making changes to your processes in the future.

4. Scaling possibilities

As a business owner, you don’t want your business to go stagnant.

However, scaling your business often comes with its own challenges, including ensuring how to keep up with the sheer volume of data you have to manage.

Pick a vendor management system that is not only just helpful for your business now but can also grow alongside it when you have triple the number of vendors.

5. Purchase orders and purchase requisitions handling capability

One thing that takes up a lot of your time during the vendor management process is purchase handling. You want to try and find a system that helps you with these processes.

Ideally, you want to manage purchase orders and purchase requisitions all on the same platform. This helps make approvals easier and can allow you to send purchase orders to vendors automatically upon approval.

6. Data security and compliance

Trusting your data with a third-party software provider can be daunting, which is why it’s key to find a provider that can guarantee that your data is stored safely and securely.

It’s important that you ask your software provider if they have industry-standard certifications and security measures such as encryptions in place.

You also want to ensure that they comply with all data security regulations.

7. Mobile accessibility

While the bulk of your vendor management work is likely to happen on a desktop, mobile accessibility is still incredibly important and useful, especially if you adopt a hybrid or remote work model.

Instead of having to wait until they have desktop access, invoice approvers can review and approve of an invoice from anywhere. This significantly reduces delays in the process.

8. Automation features provided

A big reason why you’d want to use vendor management software is to automate administrative processes that are otherwise done manually. Not only does this help you speed up the work, but it also helps you maintain better accuracy.

Consider what automation tools a particular system has to offer and whether you can take advantage of them before you commit to it.

Best practices in vendor management system implementation

1. Define clear objectives

When implementing a vendor management system in your organization, it’s key to have clear objectives that everyone knows about.

Outline what all your objectives are from the implementation process, review and revise them, and communicate them with your employees. This helps get everyone on the same page when using the software.

2. Cross-departmental collaboration

The procurement team is not the only team involved in the vendor management process.

During both the planning and implementation phases, you’ll want to involve stakeholders from different departments and work closely with them.

Encourage feedback from everyone involved so that you can fine-tune the software and the implementation process.

3. Choose the right VMS

The right vendor management system, or VMS, can differ from business to business. Make sure that you do thorough research on all the different system providers that you’re considering.

Match up the features that they offer with the goals and objectives you have. It’s the right VMS if it can help you tackle your pain points efficiently.

4. Customization and configuration

Before you start using your VMS for your daily operations, you want to explore all the customization options available and configure your system to align with your business processes.

Each feature should at least work smoothly when used concerning your organization’s specific workflows. More specific customization options can prove to be even better.

5. Clear training program for your employees

One practice during the implementation process that you don’t want to skimp out on is employee training. Make sure that you have a plan for a proper training program for your employees.

Each session should clearly explain its knowledge topic, whether it is about the vendor management system features or the goals and objectives.

6. Phased implementation approach

Implementing a new system and immediately using it for all related processes will only overwhelm your employees. A VMS is no different.

What you want to do instead is follow a phased implementation approach, which will allow your employees to familiarize themselves with the system and get comfortable with it before the next phase.

7. Continuous monitoring and evaluation

It’s important to continuously monitor your new vendor management software usage throughout the implementation process and even after it.

You will also want to have regularly scheduled evaluations to see how well your VMS is working in relation to the objectives you’ve set.

Identify any bottlenecks you’re still facing so you can make further improvements.

8. Regular system audits

While regular evaluations are good and can help you stay on track with your objectives, audits can be more thorough and will allow you to identify areas of improvement that you may not previously have identified.

Both internal and external system audits on a regular basis are useful in ensuring that you have good vendor management. 

Common challenges in vendor management system implementation

1. Resistance to change

While using a vendor management system will help you with your processes, it is also a bit of a learning curve before you can reap its benefits.

Considering the existing processes you already have, employees may be reluctant to learn a new system. You’ll want to properly address any resistance to change.

2. Data migration issue

When implementing your vendor management software, you will have to migrate data to the software to use it effectively. This could be a time-consuming step.

When done manually, it also becomes a complex task. Make sure that you reach out to your provider and work closely with them to migrate data.

3. Integration challenges

Chances are you already have other systems in place within your organization, such as your ERP or accounting software.

You’ll want to ensure that you have the right integration capabilities to allow you to integrate your vendor management system.

Ideally, your provider should be able to help you overcome these challenges.

4. Vendor adoption issues

Most vendor management systems require the implementation process to be a two-way street between you and your vendors. This is especially true for systems that offer a self-service portal, which vendors can use to update data and send invoices.

Ensure that your vendors are willing to adopt this system and help them implement it.

5. Lack of employee training

Without the appropriate training, your employees will struggle to make the most of your vendor management software. Make sure that all involved employees know what is vendor management system.

A lack of employee training will cost you, as errors are more likely to occur. The last thing you want is employees misusing the platform.

6. Customization complexity

It’s good to have plenty of customization options so that you can set up your system to fit your organization perfectly.

However, keep in mind that the more customization options you have, the more complex things can get.

You don’t want to get lost in the customization complexity and lose sight of basic features.

Enjoy smooth and faster vendor payouts with Volopay

Manage your vendors without hassle using the Volopay platform. It’s easy to onboard vendors and manage information, but you can do more than that. With Volopay, processing and paying your invoices are also simple. 

When invoice data is captured, all you need to do is refer to the vendor information you already have to make a payment on the same platform. All invoices will be automatically routed through the appropriate approval workflow.

Once approved, vendor payouts can be made with just a click of a button. It’s fast, smooth, and guaranteed to be hassle-free. No more stressing about payments when you have Volopay!

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Is it secure to use your software for streamlining vendor payouts?

Absolutely! Our feature helps you with real-time transaction monitoring, risk assessment, and invoice processing to ensure secure streamlining of vendor payouts.

How does vendor management inventory work?

Vendor managed inventory works by fabricating cooperative and mutual relationships between you and your vendors. Implying that both you and your vendor share the risk and the benefits. By looking over your company’s inventory, the vendor can help manage the whole supply chain.

Are the vendor payment transactions auto-categorized?

After the integration of your accounting software with Volopay, every expense made is assigned to a particular Chart of Accounts or Tracking Category when submitting an expense for review. These accounting fields can be made mandatory to complete an expense, so it automatically transforms into a pre-filled during expense verification and sync.