KYV (Know your vendor)—the importance of having a good vendor vetting process

Companies are constantly in the market for the right supplier, whether they’re expanding services, cutting costs or keeping pace with industry innovation. But when every solution promises to be the most advanced in the room, the sheer volume of choices doesn’t simplify the decision.

Why it matters: Knowing your vendor is just as important as knowing your customer. By properly vetting their suppliers, credit professionals can find the most suitable business partners while minimizing risk for their organization.

Your business is only as resilient as the partners you rely on. When a key vendor experiences compliance failures or other serious setbacks, the resulting disruptions can cascade through your organization, potentially causing lasting operational and financial damage.

For this reason, companies must determine whether the vendor is legitimate and trustworthy. Through vendor vetting, companies can properly verify a third-party supplier or service provider before entering a business relationship.

“Vetting your suppliers is crucial in ensuring industry standards are met, like quality, compliance and reliability,” said Karen Lando, credit manager at Irex Corp. (Lancaster, PA). “For example, if you’re working with a government agency, you have to have different certifications and other specific qualifications.”

The vendor vetting process

The vendor vetting process can vary by company and in many instances, may involve the credit department. According to an eNews poll, 56% of credit professionals said they review financial health most closely when vetting vendors, followed by 18% who look at service capability, 15% who prioritize security and compliance and 11% who rely on reputation and references.

“After the vendor submits their credit application, I run a D&B report and ask for trade and bank references if available,” she said. “This is important because if a vendor is financially unstable, they can’t supply you, which puts you in a difficult position with your own customers. You risk holding up jobs, incurring chargebacks and dealing with subpar or unsafe production.”

Ensuring security and compliance in vendors is key for avoiding any legal repercussions that could impact your own reputation and financial health. Some credit professionals check whether litigation is pending, such as any active lawsuits or sanctions against the vendor, as they can impede the supplier’s ability to fulfill their obligations. “I conduct annual reviews as well, because circumstances can change,” said Lando. “A vendor that was low risk a year ago can flip to high risk overnight.”

Asking a reference about their relationship with a vendor is helpful. Some credit managers suggest talking to someone that has visibility with the company on a daily basis, like a business owner. Someone in their position can provide critical intel such as timeliness and quality of service.

A large part of vendor vetting is ensuring they have the capacity to do the job—can they meet your company’s requirements? Can they align with company goals, whether that’s efficiency or cost reduction? By establishing clear goals and requirements upfront, you can find the most appropriate vendor.

Some credit professionals organize potential vendors through a vendor management system (VMS)—software that streamlines all useful information related to vendor activity through a single, often web-based tool.

“We currently have a database on our intranet that tracks all of our subcontractors and vendors,” said Lando. “It stores their licensing information, flags expiration dates and keeps everything organized so we can run credit reports and models—such as whether a supplier can sustain the quantity we need. We go through the full process, and nothing gets approved until all the boxes have been checked and reviewed.”

The vendor vetting process is mutually beneficial for both the company and the credit professional. “It helps you better understand how other departments function and at the same time, you’re helping drive decisions from a credit risk management perspective,” said Lando. “Becoming involved in the vendor vetting process gives creditors even more visibility to financials, helps them find new ways to mitigate risk and be more proactive in their risk assessments.”

The bottom line: Vendor vetting is critical for business longevity, enabling credit professionals to advance and contribute to their company’s overall success. “We can’t control when a customer pays, but we can control how thoroughly we vet who we do business with,” said Lando. “Whether it’s money going out or products coming in, we should be looking at risk from both sides of the equation—inflows and outflows alike.”