Vendor management system

Vendor management system

A vendor management system (VMS) is an Internet-enabled, often Web-based application that acts as a mechanism for business to manage and procure staffing services – temporary, and, in some cases, permanent placement services – as well as outside contract or contingent labor. Typical features of a VMS application include order distribution, consolidated billing and significant enhancements in reporting capability that outperforms manual systems and processes.

Vendor management is a discipline that enables organizations to control costs, drive service excellence and mitigate risks to gain increased value from their vendors throughout the deal life cycle. A vendor management office (VMO) is an internal unit within an enterprise that is charged with evaluating third-party providers of goods and services, supervising day-to-day interactions and managing longer-term relationships.

The contingent workforce is a provisional group of workers who work for an organization on a non-permanent basis, also known as freelancers, independent professionals, temporary contract workers, independent contractors or consultants. VMS is a type of contingent workforce management. There are several other terms associated with VMS which are all relevant to the contingent workforce, or staffing industry.

A vendor is literally a person or organization that vends or sells contingent labor. Specifically a vendor can be an independent consultant, a consulting company, or staffing company (who can also be called a supplier – because they supply the labor or expertise rather than selling it directly).


A VOP, or Vendor On Premise, is a vendor that sets up shop on the client's premises. They are concerned with filling the labor needs and requirements of the client.[3] The VOP does this either by sourcing labor directly from themselves, or from other suppliers, whom may be their competitors. Also, the VOP 
manages and coordinates this labor for the client.

A MSP, or Managed Service Provider, manages vendors and measure their effectiveness in recruiting according to the client's standards and requirements. MSPs generally do not recruit directly, but try to find the best suppliers of vendors according to the client's requirements. This, in essence, makes the MSP more neutral than a VOP in finding talent because they themselves do not provide the labor.,



VMS is a tool, specifically a software program, that distributes job requirements to staffing companies, recruiters, consulting companies, and other vendors (i.e. Independent consultants).It facilitates the interview and hire process, as well as labor time collection approval and payment.

A CMS, or Contractor management System, is a tool which interfaces with the Access Control Systems of large refineries, plants, and manufacturing facilities and the ERP system in order to capture the real-time hours/data between contractors and client. This type of system will typically involve a collaborative effort between the contractor and facility owner to simplify the timekeeping process and improve project cost visibility.

An EOR, or Employer of Record, is designed to facilitate all components of independent contractor management, including classification, auditing, and compliance reviews. Employer of Records help drive down the risk of co-employment and allow enterprises to engage and manage independent contractors without the stress of government audits or tax liabilities.

What is difference between vendor and supplier?

Supplier is the one who sells the goods material to vendors and vendors directly interacts with the customer and sells the finished final product to them and they intern gets paid . So vendor is the point of contact for the warranty provided for a product.

but in some cases supplier can become a vendor and directly sell his product to customer
and similarly vendor can also become a supplier in getting the goods from manufacturer.

Vendor Management Services for Maximum ROI

Strategic Sourcing: The Art and Science of Win-Win Partnerships

• Where do vendor services complement or overlap internal core competencies?
• Do multiple vendors provide the same services? Are multi-vendor strategies prudent?
• Do vendors comply with service-level agreements and regulations?
• What additional services can current suppliers provide? 
• Are contracts structured optimally?
• What vendor management strategies and best practices can be applied?

Vendors are a key part of every business. How you select and manage vendors directly impacts the bottom line — especially your ability to meet business objectives and exceed customer expectations. That’s why it’s critical to address these essential questions.
To succeed, you need to proactively establish expectations and hold each and every vendor to them. Infinitive’s Change Engineers are experts in vendor selection and ongoing vendor management. Our vendor management solutions combine qualitative and quantitative measures, helping clients maximize the benefits on individual deals and long-term relationships, and freeing them to focus on satisfying customers and growing the business.

Executives and outsourcing vendors alike are constantly evaluating what vendor management is.  Here is our quick definition of vendor management: Vendor management is the discipline of establishing service, quality, cost, and satifaction goals and selecting and managing third party companies to consistently meet these goals.

• 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.

The Fundamentals of Procurement

Objective: One reason there is so much confusion surrounding the e-procurement marketplace today is that the press so often lumps all procurement into a single group, as if all purchasing techniques and all commodity groups required the same systems and same approach. This is not the case; and there are several key distinctions that should be made when considering your company's e-procurement strategy.

·         Procurement materials can be broken down into two major categories: indirect and direct.

·         Indirect procurement involves any commodity or service that a company buys that does not result directly in finished goods.

·         Indirect procurement can be divided into two groups: ORM (Operations Resource Management) materials such as office products and travel services, and MRO (Maintenance, Repair and Operations) materials such as replacement parts.

·         Direct procurement involves materials purchased for use in the manufacturing or distribution supply chain that are "directly" related to the production of finished goods.

·         With e-procurement, the traditional division between direct and indirect purchasing paths is beginning to blur.

Traditionally, procurement has been broken down into two major categories: indirect and direct. In general terms, indirect procurement describes all of the day-to-day necessities of the workplace—staplers, paper, furniture, laptop computers, pencils, travel services—those things that tend to be of low value per item, but are usually bought in high volumes.
In the typical company, indirect procurement accounts for 60% to 80% of all purchasing transactions.
Direct materials, obviously then, are those involved in the manufacturing supply chain that are directly related to the production of finished goods. These materials tend to be purchased in large volumes, and depending on the level of sophistication of a company's forecasting and planning capacity, are, at least to purchasing specialists, fairly predictable in name, if not in exact amounts. Purchasing officers in aluminum manufacturing companies know they need to procure certain quantities of bauxite and aluminum at certain times during the manufacturing process. High-technology manufacturers know that they will require microchips, wiring, and other components. Procurement of direct goods, then, is of concern only to manufacturing, distribution, or retail companies—those that create, assemble, or move large numbers or amounts of finished or perishable goods. Because of their predictability and high volume, procurement of direct materials accounts for far fewer purchasing transactions (between 20% and 40% in manufacturing companies), but can account for up to 60% of a manufacturing firm's total procurement expenditure. ("E-Procurement: Unleashing Corporate Purchasing Power," Time, Inc.).

Indirect Procurement: ORM Versus MRO

The term ORM (Operating Resource Management) is now used commonly to describe the many ordinary office products and services that organizations purchase day-to-day: office supplies, furniture, forms, travel services, computers, janitorial and maintenance services, light bulbs, extension cords, and the like. Usually thought of as high-volume and low-dollar items, they nonetheless amount to a significant portion of a company's total spending. To give some idea of the scale, in the U.S. alone in 2000, the overall market for ORM products and services reached $725 million.
Over the years, the abbreviation MRO—for Maintenance, Repair and Operati—has come into popular use, and today most software vendors selling solutions for indirect materials (and, therefore, the popular business press) have begun to mistakenly lump all indirect goods together under this heading. But there is an important distinction that should be made. Office products should not be confused with mission critical overhaul or maintenance items. In purchasing, the two groups of goods are often known as white collar ORM (staples and notepads) and blue collar MRO (replacement parts); and the respective purchasing processes in terms of the levels of complexity, cost, and volume, vary enormously. Many analysts believe that MRO is in fact the much more important of the two.
"In spite of the current hype about the ability to buy office products or janitorial supplies over the Web," contends Lisa Williams of the Yankee Group, "the real 'gating' factor to growing this B2B e-commerce market will be the use of the Internet to manage and procure mission critical items such as component parts, expensive plant spares, and outsourced manufactured items." ("E-Procurement: The Transformation of Corporate Purchasing," Time, Inc. in association with AMR Research, Inc., May 2, 2000).
Certainly, procurement of white collar indirect supplies tends to be less complex than procurement of blue collar, or industrial, MRO, for obvious reasons. Indirect goods are seldom time or mission critical, and as important as pencils or notepads are, items like these can be purchased from any number of wholesale—or retail—vendors, each selling similar, if not identical, brands. These items can easily be described and cataloged—black ball-point pens or bond white liquid paper—and therefore do not require the specialist expertise necessary when purchasing complex electrical repair components or highly-engineered machine parts necessary for maintenance of complex manufacturing equipment. After all, it is much easier to quickly look up in a catalog—or run down to the local retail outlet—to purchase paper clips than it is to search for and procure a specially tempered, metal valve stem.
The consequences of misordering are also obviously different. Getting the wrong color ball point pen is bad, but buying the wrong shear pin or gasket for a critical assembly-line component can be catastrophic. Also blue collar MRO orders are often single-sourced, purchased in limited quantities, and are necessary to prevent the shut-down of the production lines. Blue collar MRO orders can easily amount to several hundreds of thousands of dollars, and require special service contracts. Blue collar items are often listed as inventory, tied into the company's inventory system, and accompanied with critical and complex design and performance regulations. Purchasing and maintenance employees often need to do a good deal of time-consuming prescreening of suppliers in order to understand which vendors will be trustworthy. MRO buyers are usually looking for high levels of quality control and technical support from their suppliers, so that replacement parts are delivered quickly, often at a few hours' notice. As a result, the average company uses up to 50 different MRO suppliers, and over a third of U.S. companies use 50 or more.
There are two key cost areas in indirect procurement. The first is simply the straightforward inefficiency and labor-intensity of the process itself. For most companies, the centralized purchasing function has traditionally been responsible for buying a good portion of all indirect, non-production goods—whether blue or white collar—with around half of the workload of a typical purchasing department dedicated to these low-value, repetitive orders. The average level of productivity for this area is appalling, and it is one of the most labor-intensive areas of modern business.
Part of the problem is that indirect procurement policies are seldom standardized in large or multisite companies, varying greatly between departments and between branch and corporate office. The accompanying approval policies are usually cumbersome, sometimes requiring multiple levels of sign-off, which causes delays and internal inconvenience when employees wait for needed items and middle management staff members put off signing burdensome paperwork. In exasperation, approval thresholds are raised, and spending anarchy ensues, with only the larger ticket items falling into an even more stringent and extended approval process.
There is a second area of cost. For most companies, this cumbersome, centralized process is augmented by independent, or maverick, buying by employees throughout the organization who buy items—paper, scissors, light bulbs—when needed independently, often at nondiscounted and even retail prices. This maverick buying—that tendency for individuals, or often entire departments, to buy "off-contract" without taking advantage of negotiated company discounts—is often rampant, particularly among larger companies, and typically can account for a staggering average of between 30% and 45% of all indirect procurement spending. To put the effect of this maverick buying phenomenon into perspective, consider that at these rates a typical billion-dollar company would be losing up to $10 million each year just in lost discounts alone. The smaller the company, the less formal the process, as a rule, and for those non-manufacturing companies that do not see purchasing as a core competency, a frightening 84% of indirect materials are purchased simply by employees visiting their local retail outlet. ("Survey: How Companies Order MRO Supplies," Modern Distribution Management, February 25, 2000, p. 1–2.) This "rogue buying" can be a significant cost to companies, and even a modest reduction in maverick purchasing can significantly cut procurement costs.
Source :- This article is excerpted from the author's book e-Procurement: From Strategy to Implementation

Direct vs. Indirect Spend

Direct spend refers to purchases of goods and services that are directly incorporated into a product being manufactured. Examples include raw materials, subcontracted manufacturing services, components, hardware, etc.
Indirect spend refers to purchases of goods and services that are not directly incorporated into a product being manufactured. Examples include computers, safety goggles, printed forms, office supplies, janitorial services, equipment, furniture, bags and packaging, wrapping supplies, store fixtures, receipt and point of sale supplies, floor cleaning products, building service and facilities maintenance supplies, etc.
Indirect spend includes all of the supplies that are necessary to run your organisation such as electricity, computers, furniture, capital expenditure, works and so on. The majority of indirect spend is common across all businesses but for some enterprises indirect spend expenditures can form a greater proportion of total expenditure than direct spend.  Internal services like catering, facilities management, legal or IT are often outsourced which has made the indirect spend budgets and indirect spend outlay of many organisations even larger. The breadth of enterprise indirect spend for many companies in diverse industries can be enormous, running the gamut from travel to staplers, and this often leads to corporate purchase ledgers with hundreds if not thousands of suppliers, dozens of which are frequnetly serving the same category of enterprise indirect spend requirement or capital expenditure.

Direct vs. Indirect Procurement

With the above information in mind, would procurement of items used in the delivery of a service constitute direct procurement? For example, corrugated boxes used for offsite document storage services…
Well, the answer is that If the boxes are specifically billed to the customer then, yes, it would be direct procurement. For example, if the customer gets billed for 500 boxes at $2 each, then it would be direct procurement.
If the boxes are simply factored into the overhead percentage that gets added to the direct cost, then I would consider the boxes to be indirect procurement.
Which categories you use depends on your own company needs. Many companies start with the UNSPSC. Some companies have their own internal set of codes or GL (General Ledger) or Oracle Financials “Cost Center” codes that they use as their internal indirect spend categories.

The five major differences between direct and indirect procurement

Although it has been true that in many industries, until the relatively recent past, indirect procurement has been a low priority for organizations compared to direct procurement, this is beginning to change in nearly all industries, and for companies of every size and description.
There are five major differences between indirect and direct procurement that enterprise purchasing managers, controllers, and C-level corporate managers all need to be aware of:
1. Creating Business Advantage: Direct procurement’s job is to source and manage suppliers who can support the business’ need for supply chain integration; these considerations usually don’t trouble people working in indirect sourcing.
2. Preferred Suppliers: In indirect sourcing, increasing your company’s use of a preferred supplier is critical to success. In the direct environment, very few (if anyone) on the manufacturing line will buy a component from a non-preferred supplier, while for many indirect categories everybody can use who they want.
3. Number of Stakeholders: In direct procurement, you are usually working with relatively few stakeholders (design engineers, quality managers, production specialists) who are located in a few centers of activity. The opposite is the case for the business stakeholders who influence indirect expenditure.
4. Buyer-Seller Power Relationships: Big companies can build a position of significant power over many key direct suppliers. On the other hand, almost by definition, indirect suppliers are not restricted as to which industries they can supply, so it is only on rare occasions that a company can use its volume buying power to attain a dominant position over an indirect supplier.
5. Measuring Savings: In the direct world, the focus is on cost of goods reduction. Every product has a bill of materials, and in most big companies, this is held within an ERP system. If procurement reduces the price of something, the impact on profit and loss is clear. With indirect, however, each saving made by procurement is open to questions: How much will we buy in the future? What level of compliance should we assume?

In-Direct Spending/Procurement

Succeeding in the World of Indirect Spend 

Some procurement executives believe that “spend is spend” regardless of whether it consists of direct materials or indirect spend. In reality, the indirect procurement of services is a different universe compared to the direct side. The organizational culture and landscape on the indirect side has many nuances that do not exist on the direct side. The procurement executive will therefore need to traverse the waters of indirect spend with unique strategies to ensure success.

Common characteristics of indirect procurement

The first step for any change agent is to identify the key internal stakeholders and map out the distinctive terrain of indirect spend at that specific organization. There are some common characteristics within indirect procurement that tend to be present in most companies or organizations.

The indirect spend has often been historically decentralized and often quite siloed throughout the organization. For example, on consulting spend stakeholders often believe that their consultant is the only one who has the content knowledge in their area of expertise. The same consulting company may have multiple contracts with the same company, but a dispersed approach often leaves stakeholders unaware of the ability to aggregate spend. IT services is another example of an arena with a dispersed spend. Different segments of the same company may have their own IT services to address their specific needs.

Many internal stakeholders have been accustomed to calling the shots, which often includes the selection of vendors and terms of those agreements. They are often are reluctant to turn over that autonomy. A new strategy whereby there is centralization or aggregation often leaves the internal stakeholders fearful that they will be left with poor choices, unmet needs and ineffective vendors.

Since each internal stakeholder may have their vendor of choice, the organization is often left with a large array of vendors and a challenging task of vendor consolidation.

For a cell phone manufacturer, it can be clear that you can only have one or two glass manufacturers for the touch screen. On the indirect side, internal stakeholders often don’t see the need to reduce or streamline the number of vendors.

Vendors often have a vested interested in keeping the spend dispersed across an organization. A dispersed spend can keep the price inflated at a high level. In many cases a vendor may never have reduced their pricing, because none of the internal customers have made a request for more competitive pricing.

Choosing a strategy

Once a procurement executive has a clear sightline to the indirect spend at their organization, he or she will need to use innovative strategies to aggregate it and ultimately achieve significant savings.

Mandates on using procurement contracts or blanket agreements rarely work. Creating a mandate usually creates a dynamic whereby the procurement executive becomes a Don Quixote fighting futile battles with poor results. There are common approaches that a manager needs to use to achieve cost savings regardless of the variations that may exist within their specific company.

• Identify aggregate spend through spend analytics. The first step is often develop spend analytics by category across the organization. This can be a useful tool in the early dialogue with internal stakeholders.
• Involve stakeholders at the beginning. Internal stakeholders are often more willing to comply with contracts if they have been part of the strategic sourcing initiative from the start. A leader’s initial efforts should be thought of as diplomatic effort of building bridges rather than a tactic of strong arming stakeholders through coercion or persuasion. An important initial step is to form committees of stakeholders throughout the organization. It is wise to work collaboratively within these groups to establish criteria over vendor selection for all future sourcing initiatives. Internal stakeholders also need to be part of the initial RFP/RFQ bid process.
• Present spend analytics to stakeholders. Many internal stakeholders never have been presented with objective spend analytics. If these analytics are shared combined with focus on a broad range of goals of vendor performance and reliability, the internal customer will often become a more active participant in this transformational change within the arena of procurement.
• Presenting value to aggregating spend to stakeholders. As mentioned, it is advisable to present some of the spend analytics to the internal customers. However, executives should not use the spend analytics or cost driven model as the sole motivating factor for aggregating spend or negotiating savings. Internal stakeholder are often more concerned about vendor performance, reliability and on-time delivery rather than just cost. A change agent needs to present a compelling case that adds value to sourcing initiatives in ways other than just cost reduction and saving money. An easy to use eProcurement system is one concrete example of value beyond just cost savings on the road to aggregation of spend. Internal customers also need to see the favorable results of vendor savings on their unit’s P & L.
• Rate of change. Procurement executives often are overzealous or unrealistic about the rate of change that is possible around indirect spend aggregation within an organization. It is virtually impossible to get all of the internal stakeholders on board at the very beginning. A judicious selection of the most willing and early innovators can pave the way for success by demonstrating success to reluctant participants. It is vitally important to be patient with internal stakeholders but so passive that the status quo never changes.                                                            
• Building change through consensus and not persuasion. If the executive sees the procurement initiatives as a collective and collaborative process in which everyone has input, it can change the group dynamic from one of coercion or persuasion to one of building consensus. The collective group can often bring about a far greater change than the sole efforts of one individual.
• Using a strategy of marketing to internal stakeholders. Wise strategists use an approach of reaching out to stakeholders as internal customers and not captives. Any wise marketer first will listen to the needs of their customers and then design a way to approach those needs based on their capabilities. A procurement leader should market the broad range of strategic sourcing and procurement capabilities to all of the internal customers.

 

In summary, a procurement executive will be successful in the aggregation of indirect spend and reduction of cost if he or she sees the process as a gradual journey. There will only be transformational change if the internal customers join the journey and become willing and active participants.

Source:- http://www.sdcexec.com/article/11063801/in-procurement-there-is-a-difference-between-direct-and-indirect-spend-and-the-best-organizations-know-it?

Indirect Spend Management Challenges

 Organizations face a number of issues while dealing with their indirect spend management. Procurement teams in most product-based companies have traditionally focused on reducing their direct spend, and therefore lack the experience and the art of indirect spend management. Further, indirect spend management is spread across a broad spectrum of commodities, thereby increasing the supplier base and the supply chain management complexities.

Different companies face different challenges while dealing with indirect spend management. Requirements for certain indirect spend management categories such as office supplies may be similar across companies; however, they may vary drastically for other categories such as transportation and utilities.
More importantly, what makes indirect spend management difficult is that most companies lack the leverage in negotiations with their vendors due to low volumes and thus, lose out on discounts. In most companies, low volumes may also lead to non-contractual spending (known in the spend management industry as “Maverick spend”) in certain product categories. In order to deal with all these challenges, companies need assistance and customized software from expert software provider partners whom specialize in indirect spend management solutions for enterprises of each of these varied industries.
In the current economic downturn, it is important for companies to control indirect spend management for efficiency. For companies in the services and supplies sector, it is even more critical, since optimizing their indirect spend may significantly affect their bottom lines.
The right software tools that are specialized to address and mitigate the challenges associated with enterprise indirect spend management can conduct in-depth analyses of an organization’s existing indirect spend processes (some enterprises may lack even a basic eProcurement solution for indirect spend), identify potential saving areas, patterns in requirement of indirect commodities, and shortcomings in the existing process. In addition, vendors of such software can work closely with client enterprises to help their clients create channels for bulk buying and negotiate discounts which would otherwise not be offered to these organizations. Using their software as a tool, they can then equip their companies with the leverage of volume. Further, they can help establish and standardize the purchasing process. This helps remove irregularities from the buying process, reduce overall cycle times, and help corporate controllers and finance, purchasing departments keep a check on the non-contractual spend.

Types of Indirect Spend Categories

Indirect spend has been less discussed in the academic literature than direct revenue-generating expenditure. Before discussing the current literature in this area, it is important to define what is meant by indirect spend, commonly termed MRO (maintenance, repair and operational expenditure). Indirect spend refers to the following types of spend:
1. Electrical and mechanical parts and equipment (including materials to support capital projects)
2. Electronic parts and equipment (including computers and peripherals)
3. Professional equipment (including laboratory equipment and supplies)
4. Industrial supplies (including general maintenance supplies)
5. Safety and healthcare equipment, parts and supplies
6. Machine shop supplies (industry machinery, equipment and tools)
7. Office supplies and equipment
8. Chemical supplies and equipment
9. Vehicle and fleet parts, equipment and supplies
Given the breadth of materials and services covered by this definition, and the multiple channels through which they are procured, MRO is often a highly complicated area to manage. This complexity is also frequently seen as a deterrent for firms wishing to achieve quick-wins in value for money leverage.
Furthermore, these problems are compounded by sporadic buying patterns and by a number of barriers that are difficult to overcome, including a lack of meaningful data, fragmented supply chains, and embedded local personal relationships with suppliers. It is often felt, therefore, that indirect spend is a low-value and low-risk area to manage, and the lack of immediate cost-saving leverage that is often possible in other more direct areas of expenditure is sometimes a surprise for supply chain managers and spend control practitioners when they move into these areas of more indirect spend management for the first time.
Notwithstanding these limiting factors, however, indirect spend is now receiving increased attention within some organizations, including IBM, United Airlines, Harley-Davidson, Cisco Systems, Rolls-Royce and many others. Within these firms, there has been a realization that a large share of total external spend is indirect and that there is significant potential to obtain better deals.