What Is Vendor Due Diligence?

Malcolm Tatum

"Vendor due diligence" is a term that describes the efforts of a vendor to consider the processes and procedures necessary to comply with both legal requirements and the standard and usual demands for goods or services from customers. The idea behind this type of due diligence is to make sure that the vendor operates within the limits of legal constraints and regulations while still providing support to customers in a manner that is considered professional and ethical. This type of supplier due diligence is sometimes initiated at the request of a third party, but may also be undertaken as part of the vendor’s own internal review.

Businessman with a briefcase
Businessman with a briefcase

The exact strategy in vendor due diligence will depend a great deal on the type of goods or services offered by the supplier, and the size of the actual operation. Whether a large or small company, the process of conducting due diligence will often focus on such key business functions as order collection and processing, inventory policies and procedures, the production process, and order fulfillment. Attention is also given to factors such as administrative support, marketing processes, and ongoing customer support. Within each of these areas, consideration of costs and efficiency that helps to keep those costs within reason are also evaluated closely.

There are several benefits to engaging in vendor due diligence. One has to do with expediting the process of closing with a new customer, since the vendor due diligence report will help potential clients to move forward with their own evaluation of the vendor and its operation. From this perspective, the resources devoted to evaluating the operation are eventually offset by the ability to bring customers on board sooner rather than later, making it possible to begin generating revenue from the relationship without any significant delay.

Another benefit to vendor due diligence is ensuring the company is in compliance with all current governmental regulations as well a operating in line with industry standards. The fact that many companies involve legal counsel as well as accountants in the preparation of a due diligence report also make the document helpful in bring on new clients in a more efficient manner. When prepared properly, the vendor due diligence results will cover many of the areas of interest and concern that any new client would have. The fact that the results were reviewed and found in compliance by outside professionals like a legal and an accounting firm help to reinforce the legitimacy of the detail found in the report.

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The process of vendor due diligence can also aid in identifying areas in which the company could stand to make some improvements. In this scenario, the data collected can be analyzed and used to help reduce waste, improve order collection and fulfillment processes and also aid in enhancing marketing campaigns. While the main purpose of a vendor due diligence report is to provide straightforward and complete answers to questions that potential clients may have, utilizing those results to improve the company operation can go a long way toward avoiding problematic situations later on, and aid the business in remaining competitive.

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