Do not overlook the risks inherent in bringing in new vendors to your organization. The level of risk varies in degree according to types, amounts and consequence of products or services. But even office supply vendors should be validated, as victims of printer-toner scams can attest.
Supply chain and corporate procurement researcher Jonathan Webb, in an article that appeared in Forbes magazine entitled How to Onboard a New Supplier warns that “to forgo an onboarding process can expose the company to unnecessary risk.”
Webb identifies four steps in an onboarding process:
- Develop an approval process
- Develop a vendor checklist
- Develop additional governance for more strategically important vendors
- Add the vendor to an approved-vendor list
In the first point, he offers a common example of establishing a mandate that all new vendors above a certain monetary threshold require sign-off by procurement. Purchasing departments, sometimes with input from operations, finance and legal, will typically be responsible for developing the approval process.
New Vendor Checklist
The second point is to have a checklist, particularly focused on risk along with practical information gathering. Particular responsibilities for items on the list may belong to employees authorized to purchase, the purchasing department, the accounts payable department, or perhaps a master file group. Reviewing a new vendor against an easy-to-use list assures validation and compliance.
Items on a checklist should include review of your organization’s existing vendors to see if you already have a vendor or vendors able to supply the needed product or service. And it should include validation of the proposed new vendor’s capability.
Other important items on the list are checks that the vendor is not on any national or international sanctioned list, nor owned or run by a politically sensitive person (PSP).
Once the vendor has cleared these checks, other list items include obtaining tax classification and ID number, and the information needed to do business, such as contacts, remit to or bank account information, etc. Organizations also may include certain ethical or sustainability requirements on the checklist.
Having a ready checklist, Webb says, will “Streamline the process and reduce risk exposure to the company.”
The third point applies additional steps for strategic vendors and covers such things as contract compliance, service level agreements, etc.
Once these are completed, the final step is addition of the vendor to the company’s approved vendor list and entry into the vendor master file, from which the purchasing department and other purchasers may then operate. Here it is critical to employ internal controls, such as limiting who may access the vendor master file to make additions or changes, as well as sound practices such as searching the file to ensure the vendor is not already there, and consistently following a vendor naming convention. A new vendor’s information should be complete, including tax information and tax reporting status so that subsequent responsibilities are not missed. The vendor’s bank account information should be verified prior to payment.
Following these steps reduces your organization’s risk in onboarding new vendors.