The Vendor Selection Process Demystified

Effective procurement is built on a strong vendor selection process.

Poor vendor choices lead to significant negative impacts. If a vendor fails to deliver on time or provides low-quality products, manufacturers may face production delays, and e-commerce and retail stores could experience inventory issues and lost sales. The result is a drop in customer satisfaction, ultimately harming a company’s reputation.

In this article, we’ll explain the vendor selection process, how to identify the best vendors, and the steps involved in getting the best vendors for your organization.

What is a vendor?

A vendor is a provider of goods and services, including inventory, office supplies, and equipment, to businesses or individual customers.

Also known as a supplier, a vendor completes sales or services by delivering the purchased items or performing the agreed-upon services. Then, they either collect immediate payment or invoice customers with credit terms for future payment.

What is the vendor selection process?

The vendor selection process involves a series of steps designed to match business needs with vendor capabilities and pricing. This process includes identifying potential vendors, obtaining quotes or proposals, evaluating vendors through references and a requirements checklist, and finalizing contracts.

Who uses the vendor selection process?

Procurement teams primarily use the vendor selection process. When needed, the team may involve members from other departments who are interested in purchasing or assessing a vendor’s financial stability.

In smaller companies without a dedicated procurement team, vendor selection falls to other resources, often the Controller.

How to implement the vendor selection process.

To implement a thorough vendor selection process, update company policies, create a vendor selection criteria checklist, and use an e-procurement system.

11 steps in the vendor selection process.

Here is the entire vendor selection process, step-by-step:

• Consider using e-procurement.
• Define requirements and prepare RFI, RFQ, or RFP.
• Search approved vendor lists and evaluations.
• Identify additional potential vendors.
• Refer to selection criteria and policy.
• Shortlist qualified vendors.
• View demos for significant purchases.
• Obtain customer references.
• Assess vendors’ financial stability.
• Negotiate terms and pricing.
• Contract with the selected vendor.

What is an example of a vendor selection process?

A medical device company needs to procure a software subscription for a product management system that can handle their complex workflows.

Due to the critical role this software plays in the company’s success, the vendor selection process is rigorous, involving multiple departments to ensure the selected provider meets all technical, financial, and operational requirements.

Requisition submission.

A project manager identifies the need for the subscription and submits an electronic purchase requisition. This request outlines the software’s required features, integration capabilities, and urgency due to the tight deployment timeline.

The requisition is reviewed and approved online by authorized management, signaling the beginning of the vendor selection process.

Requirement development and vendor search.

The procurement team refines detailed requirements based on input from stakeholders. These specifications are formalized into a Request for Quotation (RFQ) or Request for Proposal (RFP) and uploaded to the eProcurement platform.

The system automatically searches the company’s approved vendor list for software providers with relevant solutions. Simultaneously, the procurement team identifies additional potential vendors with expertise in developing similar applications to invite them to respond to the RFP or RFQ.

Vendor shortlisting and criteria application.

Once bids are received, the procurement team evaluates the responses using the company’s vendor selection criteria checklist.

This checklist includes criteria such as the vendor’s technical capabilities, delivery timelines, pricing, financial stability, SOC compliance, and customer service quality. After careful evaluation, three vendors are shortlisted based on their ability to meet the stringent requirements.

Negotiation and contracting.

An online negotiation process begins with the shortlisted vendors. The negotiation covers several critical aspects, including:

• Deliverables: Detailed specifications of the project management requirements.
• Pricing: Cost per user, potential volume discounts, and early payment incentives.
• Delivery terms: Initial and ongoing feature delivery schedules to ensure the software will meet the team’s needs.
• Quality milestones: Benchmarks for performance and final acceptance criteria.

The negotiation process ensures that the selected vendor offers the best value while meeting all the technical and operational requirements. Once an agreement is reached, the procurement team finalizes the contract.

Due to the complexity of the order, this contract may be a comprehensive standalone agreement or covered under a blanket purchase order with future releases.

Cross-functional evaluation and approval.

To ensure the selected vendor meets all company requirements, different functional teams are involved in the evaluation:

• InfoSec: Evaluates the software’s security credentials, such as SOC reports, to make sure it meets the company’s standards.
• Finance and credit department: This department evaluates the financial health of the vendor, ensuring they are stable enough to fulfill the contract.
• Procurement department: Responsible for obtaining and verifying customer references to assess the vendor’s industry reputation.

After thorough evaluation and due diligence, the selected vendor is added to the company’s approved vendor list, and the contract is finalized.

Post-selection vendor management.

Effective vendor management requires ongoing interaction, often through a secure vendor portal, where vendors can upload required documents and information and track payments. Once a contract is in place, the company’s project managers maintain close communication with the vendor.

This collaboration helps ensure that the vendor meets the product specifications and delivery schedule.

Upon delivery, the vendor’s performance is evaluated against multiple criteria, including on-time delivery, product quality, and customer service. This evaluation helps in future vendor management decisions and contributes to continuous improvement in the vendor selection process.

Tips on selecting vendors.

According to McKinsey, using AI can accelerate vendor selection and reduce resource usage.

Speed is an important factor in vendor selection. With AI, businesses can speed up vendor selection to days instead of months, and AI adds depth to the number of vendors considered in the vendor selection process. Your company needs fewer organizational resources for vendor selection, reducing costs.

Here are some expert tips for choosing vendors:

• Leverage AI to streamline vendor selection and broaden your options.
• Consider factors beyond price, like quality control, financial stability, customer service, and technology capabilities.
• Thoroughly vet vendors to ensure they can deliver on time and meet your quality standards.
• Check customer references for vendors under serious consideration.
• Negotiate terms including pricing, discounts, and delivery schedules.
• Account for all costs associated with the contract.

Vendor selection as part of the procurement process.

It is important to use a tailored vendor selection criteria list and an approved vendor list specific to your company. Utilize tools like Thomasnet and AI software to identify potential vendors based on product type. Industry trade associations and non-competing businesses can also be valuable resources for vendor recommendations.

E-procurement systems can streamline vendor selection, handling tasks such as vendor searches, RFI/RFP/RFQ uploads, bidding, evaluation, negotiations, and contract management. For services, include relevant employees in the evaluation process.

Importance of the vendor selection process.

Choosing high-quality vendors ensures they are financially stable and able to meet your needs while delivering on time.

A well-planned vendor selection process not only improves vendor risk management but also supports broader risk management efforts, leading to better financial outcomes, improved cash flow, and higher customer satisfaction.

How can Airbase help with vendor selection and procurement.

Airbase supports vendor selection by providing tools that streamline and improve the procurement process.

Here’s how:

• Spend orchestration: Guided Procurement routes information to all stakeholders at the intake stage, so everyone is in the loop. That makes it easy to collaborate on vendor selection, transaction information, negotiations, terms, and documentation.
• Centralized vendor management: Airbase stores all vendor information in one place, making it easy to track performance, terms, and contracts. This simplifies the vetting process and helps avoid working with unreliable vendors.
• Spend analytics: Airbase gives easily accessible info on spending by vendor and cycle times to monitor past performance.This helps ensure that purchases align with budgets and business needs while also identifying opportunities for cost savings through better vendor negotiation. Vendor data can be filtered by various criteria depending on your needs.
• Document and compliance management: Airbase helps track important vendor documents like contracts, compliance certifications, and insurance, ensuring that all vendors meet regulatory and company requirements.
• Streamlined vendor onboarding: Airbase makes vendor onboarding easy with customizable questionnaires that capture information, contracts, and payment details through a self-serve portal. Enable vendors to input details accurately and track payments independently, reducing AP team inquiries.

Through these features, Airbase enhances the efficiency and reliability of vendor selection, while also supporting better financial and operational decisions.

See how Airbase can streamline your procurement process. Book an Airbase demo!