Business Process Services

White Paper

Effective Vendor Management: Improving Supply

Chain Efficiencies, Reducing Risk

About the Author

Devaraj Chithur
Devaraj Chithur is a subject matter expert on supply chain management and a business
process services (BPS) solution architect in presales and solutions at Tata Consultancy
Services (TCS). Devaraj held several leadership positions in global multinational
companies in their delivery functions across geographies and industries. He was also
involved in sourcing, procurement, planning operations, and end-to-end supply chain
processes in various capacities for nearly 30 years. He holds an MBA, a Master's degree in
Biological Sciences, and a Diploma in Foreign Trade, and is a Certified Professional in
Supply Management (CPSM). He has guided several Six Sigma projects, and is a
frequently cited author in industry journals.

Abstract

Enterprises across industries rely on third-party vendors for essential services. These
vendors have access to sensitive data, exposing organizations to many risks. The
possibilities of vendor non-compliance to regulatory as well as internal senior
management requirements are also high. Regulatory acts such as Sarbanes Oxley
(SOX), Foreign Corrupt Practices Act (FCPA), and Health Insurance Portability and
Accountability Act (HIPAA), and standards set by government and industry bodies
such as the Federal Financial Institutions Examination Council (FFIEC), New York
Stock Exchange (NYSE), and Payment Card Industry (PCI) further complicate
compliance challenges. Organizations need to therefore diligently assess and
scrutinize vendors and contractors.
Without a robust and comprehensive vendor management program, large
manufacturing organizations, banks, and insurance and financial institutions face a
high risk of regulatory, legal, operational, financial, and compliance issues. This
paper reflects the need for enterprises to invest time and resources to effectively
evaluate and manage vendors, as well as the challenges they face in this endeavor.
Traditionally, most organizations preferred to retain vendor risk management and
performance measurement activities in-house. Given the huge investment this
requires, enterprises are now increasingly looking at engaging service providers to
manage vendor risks and achieve high quality compliance. The paper also
highlights the key features of an effective vendor management solution, including
the advantages of using sophisticated e-procurement platforms that automate
manual processes and improve compliance.

Contents

Introduction

Critical Success Factors for Effective Vendor Management

Selection and Evaluation

Quality Management

Risk Management

Performance Management

Overcoming Key Challenges in Vendor Management

Partnering with Service Providers for Greater Efficiencies

Adopting e-Procurement Systems

Conclusion

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Introduction
Many manufacturing and service organizations, including banking, insurance, and other financial
institutions outsource non-core activities to third parties. The objective may be to increase revenues,
reduce costs, or gain greater expertise and efficiency for a particular activity. For instance, third-party
product providers for banks and financial institutions include mortgage brokers, intermediaries, auto
dealers, credit card providers, and loan servicing vendors. Similarly, power plants and oil and gas
companies seek the services of third-party suppliers for sourcing oil rig components, spare parts, and
services.
Although beneficial, outsourcing key functions of an organization to multiple vendors engenders risks to
quality, regulatory and legal compliance, as well as financial, operational, strategic, reputational, and
credit aspects. Enterprises therefore need to accurately assess and mitigate third-party risks so that they
can protect themselves and their customers from potential loss. However, some large organizations have
more than 50,000 suppliers, and gaining visibility across these suppliers can be an overwhelming task.
The final responsibility for all compliance requirements remains with the client organizations and not
their vendors. It is therefore paramount for organizations to leverage comprehensive vendor
management solutions to ensure that third parties fully comply with regulatory and legal requirements
for the industry.

Critical Success Factors for Effective Vendor

Management
Vendor management enables organizations to realize optimal value from vendors throughout the
relationship cycle by ensuring quality and compliance, mitigating risks, controlling costs, and driving
excellence.
Here is a look at some of the significant aspects of vendor management:
Selection and Evaluation
A well-defined strategy and process for supplier selection and evaluation goes a long way towards
ensuring quality across the entire supply chain. This includes a clear-cut process for evaluating the
financial health of vendors before signing the contract.
Manufacturing and services organizations typically consider several categories of criteria for vendor
selection and evaluation: quality, risk and performance.

Quality Management
Third-party service providers can significantly impact the business performance of an organization. For a
manufacturing organization, the final product quality is heavily influenced by the materials and
components supplied by vendors. Biopharmaceutical companies demand stringent quality standards
from their suppliers to eliminate the risk of poor drug quality and consistency that can lead to public
health issues. These companies require prequalified vendors, proper confirmations of product
provenance, certificates of analysis, and other documentation. Most countries have laws governing
product or service liability, which apply to a product or any of its components or any service rendered.
Manufacturers are liable for damage under the Consumer Protection Act or the common law of
negligence for providing poor quality products and services.
According to quality experts, vendors are responsible for about 50 percent of a firm's product quality
related problems. However, business pressure to reduce costs often compel manufacturers to source raw
materials at the lowest cost. This practice creates an opportunity for less scrupulous suppliers to enter the
supply chain and introduce substandard materials. Hence, vendor quality management becomes an
important ingredient for market success.
Risk Management
Vendor risk management assumes great importance for service organizations, including banks and
financial institutions. These organizations could be held accountable for a third-party's breach of
consumer protection laws and regulations, as well as wrongful, deceptive, and abusive acts and practices.
These risks can lead to huge issues that attract large fines and even prison terms for contravention of the
Foreign Corrupt Practices Act (FCPA) or the UK Anti-Bribery Act.
The Office of the Comptroller of the Currency (OCC) in the US Department of Treasury expects banks to
practice effective risk management. The Federal Deposit Insurance Corporation (FDIC) reviews a financial
institution's risk management program and the overall effect of its third-party relationships as a
component of its normal examination process. Regulators, including the Office of Inspector General
(OIG), the FFIEC, and others are increasing their focus on potential third-party risks.
Organizations in all industries are prone to third-party risks. It is therefore essential to set up appropriate
policies and procedures to manage vendor relationships, and also maintain documentation of all
ongoing due diligence and monitoring. Most organizations conduct risk assessment as part of the initial
due diligence conducted before entering into a new third-party relationship, and also periodically
monitor them.

Performance Management
To ensure that vendors deliver optimal value, it is imperative to monitor and review their performance
regularly. A robust performance management policy and strategy will help realize this goal.
Organizations need to define clear key performance indicators (KPIs), and lay down well thought-out
evaluation criteria based on service level agreements (SLAs). It is also essential
to set standards at the initial contract stage, and clearly communicate the
Key activities in vendor
organization's expectations and policies with the vendors.
performance management:
Better results can be achieved through periodic meetings with vendors to
review and reset collective goals. By implementing sound performance
management practices, organizations can achieve vendor optimization by
disengaging with low performance vendors and strengthening ties with high
performers.

Implement effective
processes to capture,
measure, analyze, and
report various aspects of
vendor performance

Overcoming Key Challenges in

Vendor Management

Use scorecards and surveys

to collect vital vendor
performance data, and
analytical tools to assess
and measure the data

As organizations scale and extend their lines of business and operations, they
find themselves availing the services of many vendors across geographies.
Vendor management can therefore become complex, time-consuming, and
expensive.

Leverage dashboards and

predefined reports to
report and share the
information and insights
with key stakeholders

Utilize the reports and

findings to identify gaps
and drive continuous
improvement initiatives to
enhance vendor
performance

One of the biggest challenges in managing vendors is the need for manual
activities such as supplier selection and evaluation. This could be eliminated by
automating processes, thereby reducing efforts and costs. The latest vendor
management systems as well as web-based RFP systems help organizations
streamline and expedite processes, and drive efficiency. Another effective way
to overcome these challenges is to partner with a trusted service provider with
in-depth expertise and extensive experience in vendor management.

Partnering with Service Providers for Greater Efficiencies

Organizations can realize greater value and better efficiencies by leveraging end-to-end vendor
management services and solutions. Service providers offer comprehensive vendor management
solutions to facilitate the following key activities:

Streamline sourcing through customized e-procurement tools

Enable online vendor registrations, create vendor profiles, and facilitate updates

Support exhaustive due diligence both before and after the deal is signed, and enable continuous
monitoring of vendors

Aid vendor segmentation for risk assessment and ratings, and provide scorecards

Facilitate competitor, financial, and market analysis

Some service providers have a comprehensive analytical approach to comparing third-party vendors.
They develop an exhaustive financial model by factoring in strategic, business, and operational metrics.
Based on this model, they use a framework to outline the effect of industry trends on the products and
services organizations, and then identify business opportunities for them. Vendor management service
providers research and monitor a firm's competitors, and use that information to project growth in key
markets and industries. These service providers also enable banks, insurance and financial institutions,
and manufacturing organizations to meet their risk management guidelines.
Financial regulators emphasize the need to identify 'significant' vendors based on the spend value for
vendors, the vendor's access to confidential information, and the type of products they support. Another
key factor is whether the vendor is performing a 'critical' function for the institution, or supporting highrevenue, high-profit, or high-risk products or services. However, many firms do not have this information
readily available.
Vendor management service providers can offer this information in the form of comprehensive vendor
score cards. They analyze the firm's complete inventory of third-party suppliers and the risks they pose to
customers, and then segment suppliers by risk level. The score cards indicate the weighted average
ratings of vendors based on their financial health, market position, competition ranking, and credit
quality.
Figure 1 offers an illustrative representation of a customized workflow tool's content and reports.

Manage Process Requisition

Create RFI / RFP / RFQ

Supplier

Process Name
Process Name A
Process Name B
Process Name C

Count

Process A

Bid #

0 0 0 0

12
13
14

Live Reverse Auctions

ABC

Bid Amount

$123

Dashboards & Reports

Spend Analysis

A
Spend Top Suppliers
Supplier A
Supplier B
Supplier C

Figure 1: Content of a customized workflow tool of a service provider

Adopting e-Procurement Systems

Many organizations use e-sourcing tools. Such tools entail recurring costs every year, since license fees
are based on the number of users. This can prove too expensive for large organizations with many
locations and business units. Many service providers, on the other hand, offer e-procurement systems to
facilitate review of existing vendors, create sourcing events for selecting new vendors, and support the
final vendor selection process. They provide customized workflow tools with useful functionalities at
much lower costs.
Key features of these customized e-procurement workflow tools include:

They enable evaluation and selection of both existing and new vendors.

These are bolt-on software, providing very specific functionality to complement ERP systems, instead
of replacing them. They also employ customized business rules to meet the organization's specific
needs.

The typical means of connection between these applications and the ERP systems of suppliers and
organizations is through software components. These workflow applications are easier to manage,
upgrade, and connect to host systems.

They are cost-effective and cloud-based, and provide easy access even in remote onsite locations,
enabling employees to create purchase requisition and prepare goods receipt notes. These notes can
also be posted seamlessly in the firm's ERP systems.

A typical e-procurement suite of applications with customized workflow capability should include the
modules shown in Figure 2.

ADMINISTRATOR

SUPPLIER

CONTRACT
MANAGEMENT

REVERSE
AUCTION

eRFX

DASHBOARD &
REPORTS

PURCHASE &
REQUISITION

GRN WORK
FLOW

INVOICE
PROCESSING

MATERIAL
REQUISITION

CATALOG
MANAGEMENT

EMAIL
MANAGEMENT

Figure 2: Features of an e-procurement suite of applications

Features such as contract authoring, clause library and contract repository, when used in conjunction
with other modules of e-procurement, contribute to an effective e-procurement solution. Such a tool
should be fully integrated with the ERP system to avoid duplicate entries.

Conclusion
In an increasingly complex marketplace, third-party vendors play a crucial role in an organization's
success. In order to enhance the value of vendor relationships, and tackle their sourcing challenges
effectively, organizations need to leverage third-party expertise that is unavailable in-house. This will
enable them to conduct objective risk assessment and streamline all aspects of vendor management.
Service providers act as impartial third parties to ensure a fair procurement process for both the supplier
and the buyer. By partnering with service providers, organizations can put in place an effective vendor
management system, and respond effectively to inquiries from senior management, auditors, and
regulators.
Best-in-class service providers also help businesses automate, manage, and monitor vendors with ease
and efficiency. Their offerings can help streamline the end-to-end vendor management process from
vendor identification, request for quotations, and vendor response management, to selection,
registration, evaluation, analytics, risk assessment, and relationship management.
Organizations also need to adopt a relevant technology solution to evaluate and monitor vendor
compliance, and ensure effective management reporting. By drawing upon service providers' evaluation
techniques and wide range of vendor management services, organizations can lower supply chain costs
and substantially improve the quality of products and services.

10

About TCS Business Process Services Unit

Enterprises seek to drive business growth and agility through innovation in an increasingly
regulated, competitive, and global market. TCS helps clients achieve these goals by managing and
executing their business operations effectively and efficiently.
TCS Business Process Services (BPS) include core industry-specific processes, analytics and insights,
and enterprise services such as finance and accounting, HR, and supply chain management. TCS
creates value through its FORETM simplification and transformation methodology, backed by its deep
domain expertise, extensive technology experience, and TRAPEZETM governance enablers and
solutions. TCS complements its experience and expertise with innovative delivery models such as
using robotic automation and providing Business Processes as a Service (BPaaS).
TCS' BPS unit has been positioned in the leaders' quadrant for various service lines by many leading
analyst firms. With over four decades of global experience and a delivery footprint spanning six
continents, TCS is one of the largest BPS providers today.

Contact
For more information about TCS' Business Process Services Unit, visit: www.tcs.com/bps
Email: bps.connect@tcs.com

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