by Jon Casher, A/P Recap, Inc.

It's almost impossible to keep track of your vendors, let alone how much business you're doing with them or where they are located. Mergers, acquisitions, divestitures and name changes are happening at increasingly faster rates. The need to manage your vendor file is clear; the benefits and how best to proceed are less obvious. This article addresses the latter — why and how to manage your vendor file.

{notes: some related materials and links may be to other websites that may require registration or subscription}

Why you should manage your vendor file

Managing a vendor file may seem to be a mundane clerical task, but the implications of not managing may be significant. Four key reasons for paying attention to how your vendor file is managed are:

• Reduction of the potential for fraud
• Reduction of duplicate payments
• Knowing how much money you're spending
• Saving money by purchasing, processing and paying smarter

How to manage your vendor file

A vendor management program should include the following activities:

Vendor verification

It's often surprising how little a company may know about its vendors. The capabilities and financial stability of a vendor can be critical to its ability to deliver goods or services of appropriate quality within agreed-upon time frames.

Before adding a vendor to your file, check to see if the vendor is legitimate. Check your personnel files to see if the vendor is an employee or related to an employee. See if the phone number, taxpayer ID or address matches that of an employee. Use the Internet or one of several CD-ROM databases to verify the vendor's name, address and telephone number. If you're spending or committing to spend more than a certain amount, use a credit rating service.

Send every vendor a W-9 or a substitute W-9 and make sure that a signed form is returned. You can use a substitute W-9 to collect additional information about the vendor. You may want to request basic information including North American Industry Classification System (NAICS) codes that are replacing standard industry codes, taxpayer identifiers, telephone numbers, type of organization, types of products or services, how long vendors have been in business, and size. Minority vendor status and women-owned business information are also important. Having a signed W-9 form can help ensure that you file 1099s appropriately, and it reduces the likelihood of B-notices from the IRS.

Vendor setup

There are many ways of specifying a vendor's name and address. A one-page list of rules to use for setting up vendor names will reduce the likelihood of not finding a vendor or adding a vendor that already exists. (See Vendor Naming Convention and Why Your Checks May Still Be in the Mail)

Addresses should be set up to conform to United States Postal Service (USPS) addressing guidelines. If you already have a vendor file with inconsistent addressing rules, a USPS certified mailing house can review your file to normalize, flag and fix addresses that do not conform.

If you have vendors with foreign addresses, pay careful attention to how you set up their addresses because foreign payments can easily get lost in the mail. Only some mailing houses are equipped to analyze foreign addresses.

Decide what information you want to put into your accounts payable (AP) and purchasing systems and what information you may want in separate databases or in paper files. Low-cost imaging in conjunction with simple databases allows you to access information from W-9s and other forms quickly without a lot of effort. Use the Internet to find and capture additional background information. With some database packages, you can link directly to relevant Web pages.

Analysis

A clean vendor file is vital to your process. (See Cleaning Your Vendor File) A clean file should enable you to analyze your data to better identify who you're doing business with and how much business you're doing with individual vendors and groups of vendors.

These analyses should sharpen your focus. Prioritize and categorize so your focus is on the areas with the greatest potential for savings or leverage. One useful way of looking at expenditures is to look at high versus low dollars. Another is high versus low transaction volumes. See if your primary focus should be on reducing the number of vendors, better control of who's buying, getting better pricing, or processing more efficiently.

Purchase, process and pay smarter

Once you've completed some analysis you can really reap some dividends. By knowing how and where you're spending, you can quickly identify the magnitude of potential opportunities.
With better information about spending, you can negotiate better deals. You'll have better information about where you are or are not buying from, and better ideas as to how much you are or should be spending. Decide whether changes in procurement guidelines are needed. Decide whether to eliminate or consolidate vendors.

Before you cut back on the number of vendors too much, make sure you understand the exposure and risks. Some of your vendors may also be customers or potential customers. Some vendors may be able to meet some of the needs of your company, but not able to meet others in a timely and cost-effective manner. Remember that doing business with local companies helps you by helping the communities in which you're located.

Enhance vendor relationships

You should be able to make it easier for your vendors to do business with you and for you to get information from and to them. If you make it easier for your vendors to do business with you, their costs will be lower and some portion of those savings can be passed on to you.

Develop guidelines, set standards and establish quality measures to monitor and evaluate vendor performance and your organization's performance. Develop vendor communications programs. Document your procurement and payment policies and guidelines. A vendor handbook with guidelines and procedures for doing business with your company can eliminate many future problems. If vendors have written guidelines that spell out purchase order requirements, the approval levels and signing authority, you reduce the likelihood of incurring unnecessary expenses. Not only does this enhance vendor relations, it lessens your company's risk of exposure to claims and even fraud.

Where appropriate, use EDI, ERS, procurement cards or the Internet to send and receive electronic inputs. Approve, pay and reconcile electronically. Provide vendors with online access to purchasing and AP information to reduce and eliminate errors and telephone inquiries requiring manual intervention. Consider using touch-tone inquiry/response systems and the Internet. Enhancing the process by which you do business with your vendors can help your bottom line.

How to get started

Managing your vendor file is a team effort. Your team needs knowledge and expertise in your industry and your systems as well as general expertise in purchasing and AP. At a minimum, your AP, purchasing and information technology organizations should be involved.

Some of the expertise you'll need may require the use of external resources. When you first begin to manage your vendor file, bring in outsiders to augment your internal staff to ensure that the resulting team has the full complement of skills and resources needed to achieve the desired goals.

Make vendor management a process

In an attempt to speed up the process and reduce costs, many firms cut corners or skip some activities altogether. They are often disappointed with the results. Some lose sight of the goals and benefits. Others may treat the process as a one-shot project.

Remember, managing your vendor file is a process, not a project.

Related materials (some related materials and links may be to other websites that require registration or subscription):

Cleaning Your Vendor File
Taxing Work — the Hunt for W-9s
System Issues in Vendor Management

Jon Casher is chairman of Recap Inc., provider of financial operations consulting services. Recap clients include many of the world’s largest and most respected organizations, including half of the top ten U.S. banks. Recap services include payment recovery, vendor management, vendor leverage, escheatment reduction, and AP operations consulting services. Jon can be reached at jcasher@recapinc.com or by calling (973) 697-6430.