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Finance glossary

What is a vendor?

Bristol James
5 Min

A vendor is a company in the supply chain that provides a good or service. Vendors can supply both tangible and intangible goods. Examples of tangible goods include raw materials, supplies, and other inventory components, while intangible goods are usually software and digital products.

Companies will generally work with numerous vendors before they are able to supply their products to the end customer. For example, big box stores don’t make every product in-house. Instead, they rely on hundreds of vendors to fill their shelves.

Securing the right vendor relationships is crucial, as many vendors and their pricing can directly impact the profitability of your company. For example, if you are looking at two potential suppliers for the same items, but one is offering a lower per-unit cost of $0.50, being able to secure a relationship with the lower-cost supplier could have a positive impact on your overall profitability and financial health.

Types of vendors

Vendors can take on many different forms:

  • Manufacturing vendors: supply raw materials a business will use to create a finished product. For example, a building company will work with a manufactoring vendor to supply them wood or screws or other key building materials.
  • Retail vendors: supply products ready for resale, but on a smaller scale than wholesale vendors. This could be a designer selling their clothing brand to other boutique stores for resales.
  • Wholesale vendors: purchase products in large quantities, usually at discounted prices, to sell to retailers, like grocery and retail stores.
  • Service providers: are vendors to provide a service as a software (SASS), this could be n insurance agency or a software company.

Most businesses will have relationships with vendors; however, certain industries place more reliance on vendors. Businesses in the construction and manufacturing industries rely on vendors for raw materials to produce finished goods. Without reliable vendors, these industries will struggle to produce their finished products.

The benefits of working with vendors

Working with vendors has numerous advantages. First, vendors can infuse efficiency and cost-effectiveness into a business. Instead of trying to manufacture something from scratch or develop your own software, you can source goods and services from vendors. This also gives you access to specialized skills and resources beyond your company’s internal capabilities.

Building vendor relationships is also beneficial if you are trying to scale your business. Vendors have the infrastructure and capabilities to grow alongside your business. For example, it’s easier to adjust your purchase order from 5,000 to 10,000 working with specific vendor(s). Whereas if trying to develop products in-house, scaling to this level could bring several bottlenecks, such as the need for equipment upgrades and additional labor costs.

Key responsibilities of vendors

Vendors have a few key responsibilities. For example:

  • Responsible for the sourcing and procurement of raw materials and supplies. Vendors will either develop these items in-house or find another vendor to purchase from in wholesale quantities.
  • Delivery and logistics management. Vendors need to be sure they keep adequate quantities of goods on hand, helping your business avoid running out of products and facing delays.
  • Quality control and assurance on the products and services they deliver to customers. Vendors will verify that you are receiving the right products and in the right quantities.
  • In some situations, vendors may stock shelves and help with inventory maintenance.*

Ultimately, vendor responsibilities will vary depending on the size of the orders being fulfilled, the type of vendor a company is working with, and the specific terms of the agreement.

Vendor management strategies

Vendor management is crucial to running a successful and efficient business. Strong relationships can give you access to exclusive discounts and priority orders. Let’s say that a vendor has relationships with two companies: one that pays on time and is a great communicator and one that falls short on these tasks. Which company do you think the vendor prefers to work with?

Probably the first company. Why does this matter? Vendors that value your business are more likely to negotiate contracts and provide you with different types of discounts and rush order options. What would the impact on your profitability be if your vendor offered a 1% discount? Let’s say that you paid $200,000 for materials last year. A 1% discount is a $2,000 cost savings opportunity.

A vendor management strategy should also encompass regular performance evaluations and feedback mechanisms. Are your end customers unhappy with your lead time? Are you able to source materials from vendors more quickly to expedite the process? Is it more favorable to place less frequent, but larger orders? What kinds of discounts is your vendor offering? These are just a few of the questions that get answered during performance evaluations.

Challenges in vendor management

Vendor management doesn’t come without challenges, especially if you have multiple vendors. The accounts payable function is a prime target for cyber scammers who falsify invoice details, especially targeting companies in the construction and healthcare industry, as they are notorious for working with hundreds and thousands of vendors at any given time. If a fictitious vendor is entered and the invoice seems legit, your business could lose thousands of dollars. Adding a vendor such as Eftsure into the mix, provides a safeguard when paying vendors by fact-checking invoices automatically to be sure the invoice is correct and the right person will receive payment.

On the flip side, companies can face risks due to too much reliance on vendors. If you only have one vendor that supplies bolts for your machines, what happens if they run out of inventory or the shipping process is delayed? This can lead to business disruptions and lost revenue. Not to mention that certain industries, like food and fitness, need to abide by specific regulations and standards. Ensuring your vendors are implementing the proper protocol can be difficult. This is why making sure your team does their due diligence when signing on with vendors, to be sure the orders required will be fulfilled on time, at the quality and standard your business will need.

Summary

  • A vendor is a company that provides goods or services along the supply chain.
  • Vendors fit into four main categories: manufacturing, wholesaling, retail, and service.
  • Building strong vendor relationships can lead to minimized production delays, exclusive discounts, and better workflows.
  • Investing in the right accounts payable resources provides peace of mind, streamlines operations, and reduces your risk of vendor fraud.

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