Vendor Management Best Practices: How to Optimize Supplier Relationships & Cash Flow

Managing vendor relationships is a challenge for any business, especially for companies juggling multiple suppliers and international transactions. A structured vendor management strategy helps businesses get the best pricing, minimize risks, and maintain smooth operations.

Not all vendors operate the same way, and choosing the right ones can mean the difference between efficient supply chains and costly disruptions. Strong vendor relationships, clear contracts, and strategic payment methods help businesses stay competitive.

This guide covers vendor management best practices, how to evaluate suppliers, and what to consider when making payments. For businesses working with international vendors, Wise Business offers an easy way to do business across borders—without hidden fees or poor exchange rates.

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Understanding Vendor Management

Vendor management is the process of overseeing relationships with third-party suppliers to maintain seamless operations, cost control, and quality service. Businesses rely on vendors for everything from raw materials to software solutions, making structured vendor management best practices a necessity rather than an afterthought.

At its core, vendor management involves:

• Vendor Selection - Choosing reliable suppliers that align with business needs and quality standards.
• Contract Negotiation - To avoid disputes, establish clear terms, pricing, and service-level agreements.
• Performance Monitoring - Tracking vendor performance to keep compliance with contracts and expected service levels.
• Payment Processing — Managing invoices and payments efficiently to maintain strong relationships and financial health.

Without effective vendor collaboration, businesses can face supply chain disruptions, unexpected cost increases, and compliance risks. Studies indicate that poor contract management can lead to an average revenue loss of 9.2% annually due to missed deadlines, hidden clauses, and unfulfilled obligations.¹

When businesses implement best practices in vendor management, they can negotiate favorable terms and maintain strong relationships that support long-term success.

Vendor Management Best Practices

Effectively managing vendors isn’t just about securing the best deals—it’s about building strong, reliable partnerships that support business growth. Implementing vendor management best practices helps keep your suppliers dependable, cost-effective, and aligned with your company’s long-term goals.

1. Selecting the Right Vendors

A good vendor isn’t just about cost, as reliability, quality, and scalability matter just as much. And choosing the right vendors will set you up for success. When evaluating potential suppliers, consider:

• Cost vs. Value - Cheaper isn’t always better. Assess pricing against product/service quality.
• Reliability - Look for vendors with a track record of on-time delivery and consistent performance.
• Scalability - Check that they can handle increased demand as your business grows.

Before committing to a vendor, you’ll want to do your homework. Check online reviews, request references, and evaluate financial stability to avoid working with suppliers that might struggle to deliver.

You’ll also want to assess vendors based on compliance, sustainability, and ethical sourcing. Many companies now prioritize working with suppliers who align with corporate social responsibility (CSR) initiatives and follow responsible business practices across the supply chain.

2. Building Strong Vendor Relationships

A good vendor relationship shouldn’t simply be transactional. Rather, it’s a strategic partnership where clear communication and well-defined expectations are much needed.

• Transparency is key – Set clear expectations on deliverables, timelines, and service levels from the start.
• Negotiate better terms - Don’t accept the first offer. Price, payment terms, and service levels should be optimized for both parties.
• Long-term partnerships pay off - Reliable vendors often offer better pricing and priority service to long-term clients.
  Fostering a strong relationship can lead to benefits like more flexible payment terms, priority order fulfillment, and even exclusive discounts. Research has shown that effective vendor relationship management can save companies between 8% and 12% on direct spending, making it a good cost-reduction strategy.²

3. Monitoring Vendor Performance

Once a vendor is onboarded, perform regular check-ins to make sure they’re meeting expectations. Key performance indicators (KPIs) help track vendor efficiency, including:

• On-time delivery rate - Are shipments arriving as scheduled?
• Product/service quality - Are goods meeting agreed-upon standards?
• Responsiveness – How quickly does the vendor address concerns or issues?
  When vendors underperform, businesses should act quickly. Depending on the situation, this could involve:
• Renegotiation - Adjusting contract terms based on performance issues.
• Corrective actions - Putting structured improvement plans in place.
• Termination - Cutting ties if a vendor consistently fails to meet expectations.
  If you haven’t considered it already, use technology to simplify vendor tracking. Many businesses use vendor management software (VMS) to automate performance assessments, flag potential issues, and streamline reporting.

4. Automating Vendor Payments

Vendor payments can be time-consuming and error-prone if managed manually. Automating payments improves accuracy, cuts down on admin work, and keeps transactions on time.

• Efficiency boost - Automating recurring payments prevents delays and reduces manual workload.
• Accuracy & compliance - Eliminates human errors and ensures vendors are paid according to agreed terms.
• Better cash flow management — Scheduled payments help businesses plan finances more effectively.

5. Managing Vendor Risks

Even with careful planning, vendor-related risks can disrupt operations. Common risks include:

• Financial instability - Vendors with cash flow problems may struggle to fulfill orders.
• Non-compliance - Suppliers failing to meet regulatory or ethical standards can lead to legal and reputational issues.
• Supply chain disruptions - Natural disasters, economic downturns, or global crises can affect vendor reliability.

Tackling these risks takes a proactive approach:

• Diversify suppliers - Relying on a single vendor is risky, so always have backup options.
• Conduct regular background checks – Reassess vendor financial stability and compliance regularly.
• Use contract safeguards - Include penalty clauses and service-level agreements (SLAs) in case a vendor falls short.

Effective vendor management is about preparing for the unexpected. Diversifying suppliers, conducting regular compliance checks, and setting clear contract safeguards can help businesses minimize risks and maintain financial stability. When you take a proactive approach, it means that even when disruptions occur, your operations remain resilient and adaptable.

Final Thoughts

Strong vendor management is essential for maintaining smooth operations, reducing costs, and building long-term business relationships. Businesses can optimize their supply chain and avoid common pitfalls by selecting reliable vendors, negotiating favorable terms, and using technology for tracking and payments.

Save Time and Money On Overseas Payments With Wise Business

Wise Business can help you save big time on international payments.

Wise is not a bank, but a Money Services Business (MSB) provider and a smart alternative to banks. The Wise Business account is designed with international business in mind, and makes it easy to send, hold, and manage business funds in currencies.

Signing up to Wise Business allows access to BatchTransfer which you can use to pay up to 1000 invoices in one go. This is perfect for small businesses that are managing a global team, saving a ton of time and hassle when making payments.

Some key features of Wise Business include:

• Mid-market rate: Get the mid-market exchange rate with no hidden fees on international transfers

• Global Account: Send money to countries and hold multiple currencies, all in one place. You can also get major currency account details for a one-off fee to receive overseas payments like a local

• Access to BatchTransfer: Pay up to 1000 invoices in one click. Save time, money, and stress when you make 1000 payments in one click with BatchTransfer payments. Access to BatchTransfer is free with a Wise Business account

• Auto-conversions: Don't like the current currency exchange rate? Set your desired rate, and Wise sends the transfer the moment the rate is met

• Free invoicing tool: Generate and send professional invoices

• No minimum balance requirements or monthly fees: US-based businesses can open an account for free. Learn more about fees here

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