What is a Vendor?

Working with vendors is like cooking a meal with your family…

Suppose your family is making pizza one night. Each of you has a different role. Your son is prepping the veggies for the pizza. Your husband makes the dough. Your daughter cooks the meat. You’re responsible for putting all of the ingredients together. Your family members are like your vendors. They have to supply you with their products before you can do your job — just like companies and consumers rely on vendors to provide them with the goods that they need.

There are many different types of vendors, as they exist at different steps in the supply chain. The price at which a vendor sells a product generally increases through the supply chain. The price increases so that each vendor can see a profit margin above the price they paid for a product.

Manufacturers: Manufacturers are those companies that take raw materials and manufacture them into a finished product. The manufacturer is the first vendor of a finished product and sells the finished product at the lowest cost.

Wholesalers: Wholesalers don’t manufacture their own products. Instead, they purchase the finished products from the manufacturers to sell to retailers. When they sell the product, it’s at a higher price than they paid for it.

Retailers: Retailers are the individuals or companies who sell the products directly to consumers. Retailers are usually the final vendors in the supply chain and sell the product for the highest price, a step above the wholesale price they paid. The retailer might be a local store or an ecommerce company like Amazon.

Independent vendors: Some vendors exist independently of the traditional supply chain. Independent vendors are those that sell products directly to consumers without going through the usual wholesale and retail vendor route. These vendors might include direct sales distributors or trade show representatives.

Service and maintenance providers: These vendors provide service and maintenance. These vendors might be individuals who service and maintain a product that someone else sells. For example, the mechanic who repairs your vehicle might not be the same vendor who sold you the car. These vendors might also provide a service that is independent of someone else’s product. Examples of this type of vendor would include accountants, bankers, and marketing firms.

One thing you’ll notice about the different types of vendors is that several of the types exist as both the buyer and the seller in the supply chain. For example, a wholesaler is a type of vendor, but in a transaction between a wholesaler and a manufacturer, the wholesaler is the buyer. In a transaction between a wholesaler and a retailer, the wholesaler is the seller.

While each vendor is unique depending on what they sell and where the vendor falls within the supply chain, the typical vendor transaction is going to look similar.

The first step in a vendor transaction (assuming you’ve already found the vendor you need) is often making a purchase order. To complete this step, you’ll get authorization from your purchasing department, and then communicate your needs to the vendor.

Next, the vendor will deliver the product to you. At the same time this happens, the vendor usually also provides the invoice. Once you receive the invoice, you’ll send it to your purchasing or accounts payable department, which is responsible for paying the bill.

What comes next depends on what type of company you have. If your business is a wholesaler who has purchased from a manufacturer, you’re typically going to turn around and sell the product to a retailer.

If you’re a retailer and you’ve just purchased products from a wholesaler, it’s likely time to get the product on the shelves for consumers to buy. Either way, most vendor transactions result in the buyer becoming the next vendor.

The only exception is if you’re the consumer and the vendor you’ve purchased from is the retailer, in which case the supply chain ends with you.

Vendor and supplier are two terms frequently used to describe participants in the supply chain. While some people use the terms interchangeably, usually, the terms apply to two different types of companies.

A vendor is any entity in a supply chain that provides a good or service to a business or the end consumer. On the other hand, a supplier is an entity that provides raw materials for another business. Suppliers exist at the beginning of the supply chain.

The product manufacturer is a vendor who sells a product to a wholesaler. But what about the company that sells the raw materials to the product manufacturer? That firm is a supplier. Suppliers provide raw materials, while vendors offer a finished product.

A vendor payment occurs when one company within a supply chain pays a vendor for products it’s purchasing. A company can either make a vendor payment or receive a vendor payment. Depending on whether you’re referring to the buyer or the seller in the transaction, this payment could be known as either accounts payable or accounts receivable.

Suppose we’re talking about a transaction between a wholesaler that sells small appliances and a retailer that sells those appliances to consumers. The retail store places an order of coffee makers from the wholesaler. The wholesaler ships the coffee makers to the retailer, along with an invoice for the products.

That invoice goes to the accounts payable department within the retail company. Accounts payable is the department responsible for making vendor payments. On the side of the wholesaler, the accounts receivable department handles the amount the retailer owes them.

Think of it in terms of the buyer using a credit card to place the order, except instead of a credit card company, they’re borrowing credit from the wholesaler. That credit debt is the accounts receivable to the wholesaler.

Vendor management refers to the process that companies use to work with vendors. Vendor management includes the process of researching and sourcing vendors that best fit the goals of the company.

If you were opening a burger restaurant, you probably wouldn’t just buy your beef from the nearest vendor. Instead, you’d do some research to find the vendor that fits within your budget and quality requirements.

Vendor management also refers to communicating with vendors to ensure that products are delivered when you need them and in the quantity that you need them.

If you were responsible for vendor management at a clothing store, you’d be responsible for letting the vendors know when you need another delivery of a particular item. Not only that, but you would need to ensure you’re paying the vendor promptly when they make a delivery.

Finally, vendor management includes fostering vendor relationships. Companies generally seek a positive working relationship with vendors. A good relationship usually leads to better communication and generally allows both parties to get the most out of the relationship.

If you’re starting a new business, one of the most challenging tasks you’ll have ahead of you is finding vendors with which to work.

First, you’ll need to identify what type of vendors you’re looking for. If you’re a wholesaler, you’ll be looking for manufacturers that make the products you want to sell. If you’re a retailer, you’ll have to find wholesalers that sell those products. Depending on what type of business you’re starting, you’ll probably need multiple vendors.

Once you know what kind of vendors you’re looking for, there are a few places you can search. One option is to join an organization or community group with others in your industry. If you’re starting a restaurant, considering joining a restaurant association to learn about what vendors other restaurants use.

You might also seek out trade journals or magazines for information about vendors. Finally, a simple Google search will often provide you with plenty of results for the types of vendors you need.