How to create powerful vendor management policies

As a business owner, you’re no stranger to policies. You likely have insurance policies, workplace policies, and health and safety policies.

The word “policy” is a fancy-sounding term for something fundamental to running a business. Consider it a safeguard to ensure the company makes appropriate, rational decisions to stay on the road to success. 

So if you don’t have a solid vendor management policy yet, now is the time to work on it. Without deliberate and considered vendor management policies, a business is at risk of making haphazard decisions, wasting money, and being inefficient in its dealings with vendors.

Let’s take a closer look at how to create a powerful vendor management policy and what it entails.

Evaluation Process

The best way to find quality vendors is by conducting a thorough vendor evaluation process. 

Vendor evaluation involves researching the market, creating a shortlist, and assessing potential vendors according to the parameters most important to you. It’s a good idea to develop company-wide policies on evaluating vendors — this will help your organization maintain a consistent, thorough vetting approach.

For example, a policy can dictate the specific number of vendors to shortlist and evaluate for every vendor search, which will prevent impulsive decision-making. The vendor management policy can also specify what parameters your company will evaluate for all vendors, such as budget, quality, completion time, and communication.


Compliance is a complex and sensitive issue for many businesses, particularly those that are in highly regulated industries. What’s more, data privacy laws make compliance a central concern for just about every company today. Creating vendor management policies that support compliance is essential because the consequences of noncompliance can be severe.

An organization should enact compliance policies during the evaluation stage before signing on with a vendor. For example, third-party vendors that store, process, or share information for medical providers, such as protected health information (PHI), must undergo a thorough HIPAA compliance assessment. 

In the case of vendors supplying a restaurant with fresh produce or dairy, compliance with food safety standards takes center stage. Compliance checks will vary depending on the type of vendor and industry. A good policy should account for all the relevant compliance measures.

Contracts and SLAs 

Vendors come in all shapes and sizes. Before signing with a vendor, negotiate terms and conditions, pricing, and deadlines. You can specify and formalize all of these via a contract or service-level agreement (SLA) tailored to each vendor.

Vendor management policies help enormously in the process of drawing up effective and foolproof contracts. For instance, company policy can dictate that multiple managers and an attorney check a contract. 

A vendor policy typically covers payment terms as well. For example, a business may have a policy of paying vendors up to 30 days after receiving the invoice to ensure sufficient funds are available to honor the payment.  

There’s no need to write every vendor contract from scratch. Save time by developing policies for basic contracts and agreements that are easy to adapt for specific vendors. 

Vendor ratings

To reach its goals, a business must expect certain standards from vendors.

If a manufacturer relies on a vendor for components, late deliveries will hold up the production line. When a business uses the services of a third-party marketing consultant, performance metrics will identify whether the vendor is living up to its promises. 

The only way to know if a vendor has reached its goals is to set KPIs (key performance indicators) and track vendor activity on an ongoing basis. You can accomplish this with the help of vendor ratings.

A good vendor management policy always includes a rating system, whether it be a vendor scorecard or another method, to monitor vendor performance.

Contingency plans

There’s no such thing as smooth sailing when it comes to vendor management. Problems inevitably arise, even with the best vendors. That’s why it’s important to have contingency plans in place. 

Some issues don’t require an immediate resolution. In other cases, a problem with a vendor may be urgent, and your organization will have to deal with it immediately to maintain business operations. For example, a problem with a critical third-party software system outside of office hours demands the attention of the vendor — even if it’s 2 a.m. 

Create vendor management policies that identify the owners, stakeholders, and necessary steps for possible eventualities, starting with critical emergencies and working down to less immediate issues.

Periodic reviews

Good vendors are like gold. But you can ensure ongoing quality and positive communication only if you’re on top of vendor performance. That’s why vendor management policies should incorporate regular vendor reviews. 

Reviewing vendor performance doesn’t have to be complicated or time-consuming. The fastest way to get feedback is via review questionnaires for employees who work with the vendor. You can easily create vendor performance reviews with the help of online form templates and send them to the relevant employees at regular intervals. 

The frequency of vendor reviews will depend on your business and the type of vendor. It may be necessary to review some vendors once every year or quarter; others may require a review once a month. A powerful vendor management policy has built-in guidelines about how and when to conduct reviews, who should participate, and how the organization will examine and act on results. 

What’s your vendor management policy?

The leased coffee machine breaks down at 11 a.m. Critical vendor software is acting up. A vendor has ended their contract, and you need to find a replacement. These are just some of the challenges that arise with vendor management. In all of these instances and more, you’ll find that creating solid vendor management policies will guide the way to the best result. 

Rather than resorting to crisis mode, get your vendor management policies in place today, and your business will be in an excellent position to handle vendors, no matter what happens.

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