What is Vendor Relationship Management(VRM) - Definition, Best Practices and Challenges

Q: How can vendor management improve procurement outcomes?

Vendor management improves procurement outcomes by shifting supplier relationships from transactional to strategic. This leads to cost savings, higher product quality, better innovation, and reduced risk.

Q: What metrics or KPIs indicate strong vendor relationships?

Key indicators of strong vendor relationships include on-time delivery rates, order accuracy, adherence to pricing and contract terms, low defect or return rates, responsiveness to issues, and compliance with service-level agreements.

Q: How often should vendor relationships be reviewed or assessed?

High-risk or critical vendors should be reviewed quarterly or semi-annually, while moderate-risk vendors are typically assessed annually or every 18 to 24 months.

Nasir R

7 min read | Last Updated: 31 Dec, 2025

TL;DR

73% understaffed risk teams: 2025 study shows 73% financial institutions have ≤2 employees managing 300+ vendors; 49% reported vendor cybersecurity incidents.
Vendor consolidation saves costs: Reducing supplier pool streamlines operations, improves pricing; McKinsey reports 50-80% total costs from external spending often overlooked.
Five VRM best practices: Choose right vendors, conduct risk assessments, foster open communication, track KPIs (on-time delivery, quality, compliance, responsiveness), use software.
Common challenges addressed: Contract vagueness, lack of transparency, poor communication, inconsistent quality, compliance risks threaten operations requiring proactive governance and monitoring.

Vendors have a major impact on your company’s success, and how you manage their relationships can make or break your business. They directly affect your operational efficiency, financial performance, and even competitive advantage.

But most organizations overlook or under-invest in vendor relationship management and only focus on vendors when regulators, customers, or a disruption forces their hand. A 2025 study on financial institutions revealed that 73% have two or fewer employees managing vendor risk, even though most oversee over 300 vendors. This is a cause for concern, as approximately 49% of the institutions reported a vendor-related cybersecurity incident in 2024.

Ignoring vendor relationships can lead to compliance and legal issues, increased cyber and data risks, and damage to your reputation. Our comprehensive guide takes a deeper look at vendor relationship management best practices and how to strengthen your relationships for optimal results.

What is Vendor Relationship Management?

Vendor relationship management is the process of overseeing and optimizing collaborations with vendors, suppliers, and service providers. It’s about building mutually beneficial partnerships that ensure vendors deliver quality products or services at the right price, on time, and in alignment with your company’s goals.

While you pay your vendors to provide specific services or products, nurturing these professional relationships makes them feel valued, and in turn, they support your long-term success by improving efficiency and unlocking new opportunities for innovation.

Benefits of Strong Vendor Relationships

To enhance business profitability and efficiency, you must be strategic about managing vendor relationships. Here are the top benefits of strong vendor relationships.

1. Lower costs through vendor consolidation

Building strong supplier relationships makes financial sense. Your company incurs significant costs every time it partners with new vendors. Reducing your supplier pool and partnering with a few key suppliers makes your supply chain more streamlined and efficient. You also get better pricing.

2. Improved service quality

McKinsey reports that for many companies, 50–80% of total costs come from external spending, yet this area typically gets less focus than sales or efficiency initiatives. Ensuring vendors are consistent with the product or service quality is vital to a company’s success. Set clear expectations, monitor performance regularly, get feedback, and give incentives for excellence. This ensures vendors maintain consistent quality standards for the products and services your company buys.

3. Increased efficiency

As your relationship with vendors develops, communication improves. They understand your business better and meet your needs more effectively because they know exactly what’s required. Supply chain delays are minimized, errors are reduced, and business operations run smoothly. And if occasional issues do arise, the vendor works hard to resolve them because of your healthy working relationship.

4. Minimized price volatility

Huge fluctuations in market prices can make you lose consumers in droves. And while price swings are unavoidable, you can address this through well-structured vendor contracts. For example, a vendor can offer fixed pricing or scaled increases in exchange for minimum order levels or lengthier contract terms. When vendor prices are clear, your company can set pricing structures with some certainty, which leads to happier, more loyal customers.

Vendor Relationship Management Best Practices

Whether you’re building new vendor relationships or looking to refine your existing ones, apply these strategies to establish a mutually beneficial relationship.

Choose the right vendors for your organization

Good vendors provide high-quality products at a great price to boost your company’s overall performance and competitive edge. They must be experts in your industry, be financially stable (as this will affect your business), and have a good professional history. Clearly communicate your expectations and formalize them through contractual terms and SLA.

Conduct risk assessments

Your risk surface expands with each new vendor, so perform risk assessments to identify the potential threats they might expose you to and use the most effective mitigation strategies. For example, if you’re buying HR software, assess the vendor’s security and privacy risks. After you run assessments, communicate the risks you want addressed. And remember, a vendor’s risk profile evolves over time, so run regular risk assessments.

‍Foster open communication and transparency

Building good relationships with vendors requires careful rapport-building. Have clear, documented communication to protect yourself from risk and ensure long-term alignment. Share the points of contact, modes of communication, and the communication structure both parties should follow.

Track vendor key performance indicators (KPIs)

This helps you assess whether vendors are meeting expectations. Keep a close eye on the quality and consistency of products and services, and check how well the vendor conforms to SLAs. Here are some of the main vendor KPIs to track:

‍On-time delivery rate
Quality of goods/services
Cost compliance
Contract and SLA compliance
Responsiveness and communication

Outline the steps to take if a vendor doesn’t meet standard performance expectations. You can set a threshold for corrective action to streamline problem-solving.

Get vendor management software

Manual processes, such as onboarding checklists and contract renewal spreadsheets, can give different results each time. Vendor relationship management software ensures information flows seamlessly, optimizing resource allocation and decision-making for vendor-facing teams. You get real-time insight into vendor updates, automated risk assessments, and centralized performance tracking.

Common Challenges in Vendor Relationship Management

Managing vendor relationships is no easy task, as it can make or break your business. Here are the common challenges most businesses encounter:

Contract and negotiation difficulties

If your contract is vague or incomplete, important details such as pricing, product quality, service standards, and delivery timelines may be left open to interpretation. This may lead to disputes or unexpected costs down the road.

Lack of transparency

If you lack full visibility into how a vendor operates, you may be caught off guard by hidden costs, compliance issues, or delays that disrupt your supply chain and damage customer trust. Without transparency, it becomes difficult to plan or manage risks, and problems may only be discovered when it’s too late.

Poor communication

Poor communication with your vendors regarding roles, expectations, and deliverables can cause misunderstandings, delays, and disputes. Communicate updates, changes, or issues promptly to prevent small problems from escalating into costly disruptions.

Inconsistent quality

It’s difficult to manage vendor performance when there are no KPIs or standardized metrics in place. You can’t objectively measure their reliability, consistency, or overall value. For example, a vendor may always deliver products on time but consistently provide low-quality products. Quality issues can lead to customer complaints, returns, and damage your business reputation.

Compliance and risk issues

Vendors can expose your business to regulatory non-compliance, data security risks, supply chain disruptions, and breaches of contract, leading to legal, financial, and reputational damage. Do your due diligence and implement strong governance to safeguard your business against these risks.

Strengthen Your Vendor Relationships with ComplyScore®

Managing vendor relationships isn’t merely about ensuring you get along; it’s about anticipating risks and optimizing services and costs to get the best value from each partner. Use our vendor relationship management best practices to build strong, mutually beneficial supplier relationships.

ComplyScore® by Atlas Systems enables you to centralize supplier data, automate risk assessments and performance tracking, and enhance collaboration with vendors.

See ComplyScore® in action. Learn how it can help you boost efficiency, reduce risks, and drive cost savings. Book a demo today.

FAQs on Vendor Relationship Management

1. What tools are available for vendor relationship management?

Tools for vendor relationship management include vendor management systems (VMS), third-party risk management (TPRM) platforms, contract management software, supplier relationship management (SRM) tools, and collaboration platforms.

2. How can vendor management improve procurement outcomes?

Vendor management can improve procurement outcomes by transforming the relationship with suppliers from a transactional one into a strategic partnership. This fosters strong relationships that lead to cost savings, higher quality products, enhanced innovation, and lower risks.

3. What metrics or KPIs indicate strong vendor relationships?

KPIs that indicate strong vendor relationships include consistent on-time delivery rates and order accuracy, adherence to agreed pricing and contract terms, low defect or return levels, responsiveness to communication and issue resolution, and compliance with service-level agreements.

4. How often should vendor relationships be reviewed or assessed?

Important or high-risk vendors should be assessed quarterly or semi-annually, while moderate-risk vendors should be assessed annually or every 18-24 months.