What is a Preferred Vendor Program (And How Does It Benefit a Business)?

Imagine this: Your business needs a steady supply of critical raw materials every month. You source these raw materials from three different vendors. The first among these three vendors always delivers on time. The other two vendors, although pre-approved, often take longer to deliver the same amount of raw material.

With pricing and quality at par for these three vendors, you prefer buying from the first supplier, especially when the business needs raw material quickly.

The above example shows why many procurement professionals prefer buying from the same suppliers. But does this arrangement always benefit the business? Let’s find out.

What is a Preferred Vendor Program? 

A preferred vendor program is a strategic arrangement where a business identifies and partners with a select group of suppliers who meet predefined criteria for cost, quality, reliability and performance. These vendors receive preferential treatment in exchange for better pricing, service levels, and other value-added benefits.

Preferred vendor programs are designed to allow buyers to quickly source goods and services at competitive prices with minimal effort. 

Here are the key features of a preferred vendor program: 

• Pre-qualified vendors

Vendors are pre-qualified based on a rigorous selection process that assesses their track record, product quality, financial stability, compliance and other factors.

• Volume commitments

Buyers often promise a certain volume of business with the vendor in exchange for favorable terms or discounts.

• Formal agreement

There is a formal arrangement in place with an agreement that outlines the terms of business between the buyer and vendor. It details mutual roles, product standards, pricing, and delivery expectations. Both parties agree to abide by the conditions of the agreement.

Preferred Vs. Approved Vendors

Businesses shortlist preferred vendors based on multiple parameters including cost, quality, customer support, etc. These vendors offer more favorable terms, which prompts the business to prioritize them during contract negotiations.

Approved vendors, on the other hand, meet predefined criteria and are therefore deemed apt for business. They may not offer the same benefits as preferred vendors but can deliver satisfactory goods and services.

Benefits of a Preferred Vendor Program  

For Buyers

• Cost-effective

With a preferred vendor program, users can quickly identify and choose the right suppliers for required goods and services at competitive prices. They do not need to initiate a sourcing process every time.

• Shared values

Buyers know that preferred vendors are reliable and align with their business values and goals. This reduces the possibility of conflicts arising out of misalignment and ensures vendors remain committed to the company’s long-term success.

• Risk mitigation 

Working with preferred vendors allows both parties to work in close collaboration. They can streamline operations, identify potential risks early and take preventive action. Procurement can effectively monitor supplier performance and determine if vendors are meeting contractual obligations.

• ESG driver

Working with the same suppliers allows procurement to regularly monitor their ESG practices. They can also dive deeper into the supply chain to check if their suppliers’ suppliers comply with sustainability regulations.

• Innovation

A preferred vendor program creates a mutually beneficial work environment. Vendors can use their expertise to create new and better products, which can be accessed by internal teams.

For Suppliers

From a vendor’s perspective, a preferred vendor program provides a clear picture of demand. With greater visibility into future demand patterns, vendors can plan their production process more efficiently. Vendors also benefit by getting early access to new projects, and increased recognition for their business.

Need to Actively Monitor

Despite a preferred vendor program, procurement must actively monitor vendors throughout the duration of the contract. 

Procurement must refine and reinforce vendor relationships and work together to anticipate and mitigate potential risks, build resilience and develop more efficient operations. It should also review vendors’ alignment with specific business goals.

Additional Read: The Importance of Vendor Analysis and How to Improve Yours