Vendor vs Supplier: Understanding the Key difference

Introduction

The difference between vendor and supplier is analogous to the difference between the two sides of the same coin. While they are part of the same coin, they have distinct characteristics.

The supply chain best represents the flow of goods and services. Typically, a supply chain can be depicted as Supplier > Manufacturer > Distributor > Vendor > Customer. As is apparent, vendors and suppliers are essential links in your supply chain process.

‘Teamwork makes the dream work’ is often quoted and applies well to your business’s supply chain. With the supplier providing the inputs for your business operations and the vendor selling your outputs to the end user, they are part of your team.

What is difference between vendor and supplier and their role in the business landscape? In this article, we will comprehensively answer this question.

What is difference between vendor and supplier?

Vendors and suppliers have specific attributes that help to facilitate the flow and transfer of goods and services from the raw materials stage to the final consumer. The definitions spell out the fundamental difference between the vendor and supplier. 

1. Definition of supplier

A supplier is a person or a company that supplies raw materials, components, tools, or services to manufacturing businesses. These are all essential resources required for the production of goods. It positions the suppliers as the first link in the supply chain. 

2. Definition of vendor

A vendor is an individual or a business entity typically selling finished products or services directly to individual or business customers. As vendors deal directly with consumers, they serve as the last link in the supply chain. 

Understanding the distinctions between the two will help you make informed decisions to improve operational efficiency and prevent errors in third-party risk and supply chain management. 

However, the first step would be to clarify the importance of understanding the distinction.

Read More: Vendor Management: What is it, Types, Process and Tools

Importance of distinguishing between vendors and suppliers

The terms vendor and supplier are used interchangeably in the context of supply chain roles and duties. From a bird’s-eye view, they both provide goods and services. However, with a closer look, we realize that specific attributes distinguish each, giving them distinct roles.

Let’s look at how this clarity can help your business fine-tune the third-party and supply chain management processes. 

1. Strategic procurement

Understanding vendors’ and suppliers’ different roles and benefits empowers you to strategize your procurement process effectively. You could source the right products or services, whether raw materials for production (suppliers) or finished products for sale (vendors).

2. Cost efficiency

Each has different cost structures. Understanding the difference between the vendor and supplier can help to negotiate better deals and result in cost savings. 

3. Quality control

Quality standards of your products and services can be maintained by recognizing the source. For suppliers, keeping a check on the quality of the raw materials is critical, while for vendors, the focus is on the quality of the end product. 

4. Effective inventory management

Understanding the differentiation enables businesses to manage their inventory efficiently. Raw materials and finished products require distinct inventory management strategies.  

5. Supply chain resilience

The difference between the vendor  and supplier can help businesses identify reliable sources. It will diversify the supply chain, making it more resilient to disruptions. Also, businesses can have backup plans to ensure operations continuity. 

6. Strategic partnerships

The difference between vendor and supplier defines the nature of the partnerships. Long-term relationships can be built with suppliers for consistent supply and with vendors for expanding market reach. 

7. Customer satisfaction

Understanding the difference means that you can provide accurate information, like delivery dates or product quality, to end customers. This transparency builds trust and enhances customer satisfaction.

8. Risk mitigation

Differentiating the vendor from the supplier helps businesses pinpoint risks effectively. For example, if a critical supplier faces challenges, alternate sources can be identified quickly and mitigate potential disruptions. 

Read More: Strategic Procurement: What is it, Objectives, Process & Example

Now that we have established the reasons to understand the difference between vendor and supplier, let us look at the key differences. 

Key Differences Between Vendors and Suppliers

Aspect	Vendor	Supplier
Scope	Typically transactional, focused on specific sales.	Can be transactional or strategic, involving relationships with the company.
Nature of relationship	Often business-to-consumer, direct interactions with consumers or retailers.	B2B relationship, supporting other businesses in their operations.
Product vs service focus	Mainly product-focused, selling finished goods.	Product-focused when supplying raw materials and service-focused when providing services like IT services.
Contractual agreements	Contracts are mostly sales with customers or retailers.	Detailed contracts with businesses,  specifying terms, quality standards, and delivery schedules.
Supply chain integration	Positioned at the end of the supply chain, catering to consumer demands.	Can be part of both upstream (providing raw materials) and downstream (providing services) supply chains, influencing production and operations.

You would want to know your vendor better, with all his roles and responsibilities for your business. Let’s take a closer look.

What is a vendor?

Vendor is 

• A person or a company buying products or services from distributors and reselling them to individual consumers
• In direct link with the consumers without any intermediary distribution channels
• Focused to monitor customers’ interests and have enough stock available to meet demand 

Retailers can also be considered vendors as they supply products directly to consumers, typically in small quantities.

Examples of vendors can span a broad spectrum. At one end of the scale are street vendors, hawkers, and market-stall sellers, with global corporations like Flipkart and Amazon on the other end. Of course, countless SMEs exist between the two ends of the spectrum.

How do vendors work?

The process of how a vendor works might vary to some degree among the different types of vendors. Vendor services differ depending on the nature and business size.

Here is how a vendor would typically work.

1. Sourcing or production

Vendors either produce the products they sell or source them from manufacturers, wholesalers, or other suppliers. 

2. Sales channels

Vendors may sell a range of products through various channels through physical stores, online marketplaces (like Amazon or eBay), e-commerce websites, or a combination of all these channels.

3. Marketing and sales

Vendors employ marketing strategies to promote their products. This can include online advertising, social media marketing, email campaigns, newspaper advertisements, and more. Vendors interact with potential customers, answer queries, and facilitate sales transactions.

4. Order fulfillment

A buyer may purchase a product or make a direct purchase. Fulfilling the order includes picking the product from inventory, packing, and arranging shipment or delivery to the customer’s location. 

5. Payment processing

Vendors send invoices, manage payment processing, and ensure secure transactions. They work with payment gateways, handle various forms of payment, and ensure the financials of the sale are appropriately managed. 

The sale cycle of the vendor is completed by the consumer paying for the products. However, a few vendor responsibilities go beyond the sale.

Read More: Vendor Payments: Meaning and Process

Vendor Responsibilities

Vendors have different responsibilities based on the nature of the business, the industry, and the specific agreements made between the vendor and the buyer.

Some of the typical duties a vendor would perform are as follows.

• Inventory management: The vendor must take inventory regularly to ensure an adequate supply of goods to meet the market demand.
• Product/service quality: Vendors are responsible for the quality and reliability of the products or services.
• Timely delivery: Vendors are also responsible for ensuring the goods reach the customer at the intended destination within the agreed-upon timeline. 
• Customer service: Vendors should provide post-sales support by handling product inquiries, returns, refunds, and complaints.
• Communication: Another important duty of the vendor is to maintain open and transparent communication with the consumers, providing updates on orders, delivery, and any relevant information. 
• Supply chain management: Vendors should coordinate with manufacturers to ensure a steady supply of products. It includes negotiating contracts, managing relationships, and adapting to changes in demand.
• Documentation: Vendors must maintain proper records of transactions, contracts, invoices, and other relevant documents. 

Types of Vendors 

Broadly, vendors can be of two types: product and service. Each caters to specific needs within the marketplace. 

Understanding the types of vendors is essential for businesses looking to collaborate or source products or services that align with their specific requirements and target consumers. 

Here are more details about each type of vendor. 

1. Product Vendors

Product vendors are businesses or individuals that specialize in selling physical products to consumers or other businesses. You can find product vendors in various sectors, offering various products, from electronics and clothing to household items and industrial equipment. 

Product vendors may sell their goods through various channels, including retail stores, online platforms, wholesale distribution, and a combination of these methods.

Product vendors can be further categorized as follows, depending on the market.

• Retail vendors – physical/online stores to individual customers
• Wholesale vendors –  bulk quantities to retailers, other businesses, or institutional buyers. 
• Online marketplace vendors –  operate on platforms like Flipkart or eBay to global customers.
• Food vendors – operate from restaurants, food trucks, or online for delivery.
• Local farmers and artisans – fresh produce or artisanal products at local markets or online platforms. 
• Manufacturers – Produce and sell to retailers, wholesalers, or consumers.
• Dropshipping vendors – Procure from third parties and ship directly to customers.

2. Service vendors

Service vendors offer expertise and specialized services to businesses and individuals. They provide intangible solutions, from consulting and IT services to marketing, healthcare, and event planning. 

Service vendors are experts in their respective fields and tailor solutions to meet the unique needs of their clients. They often operate as freelancers, agencies, or independent consultants, using their skills and knowledge to enhance business, improve processes, and drive innovation and growth across various industries.

Here are a few examples of domains where service vendors play a crucial role. 

• Consulting firms
• IT service providers
• Healthcare service providers
• Legal services
• Marketing agencies
• Financial services
• Educational services
• Event planning services
• Fitness and wellness trainers
• Travel and hospitality services
• Transportation and logistics
• Cleaning and maintenance services

Both types of vendors are essential components of the supply chain, serving varied market segments and meeting the diverse needs of consumers and businesses.

Quick Read: Vendor Management System (VMS): Benefits, Features & TOP Systems

Role of Vendors in the Supply Chain

A Vendor’s role is crucial as they source, create, or curate products and services to meet the demands of the marketplace. Vendors have the market’s pulse as they directly connect with the consumers.

Vendors

• Manage inventory
• Optimize pricing strategies
• Provide delivery and customer support

Therefore, they 

• Streamline the distribution process
• Reduce costs
• Enhance efficiency throughout the supply chain

Well, that is half the story. Let us look at the equally important other half, the supplier. 

What is a supplier?

A supplier is an entity or individual that provides goods, services, or raw materials to another organization. They ensure the availability of essential components for your business processes.

Whether they provide raw materials and components to manufacturers or technological infrastructure to SaaS platforms, suppliers provide the bulk of the value of your products. Suppliers are crucial business partners, contributing to product quality, supply chain efficiency, and overall operational success. 

How do suppliers work?

Here is how a supplier would operate typically.

1. Sourcing or production

Suppliers either produce the goods they provide or source from manufacturers, farms, or other producers. They may also offer specialized services.

2. Quality control

Suppliers need to maintain high-quality standards for their products or services. This involves rigorous testing, inspections, and adherence to industry regulations and standards. 

3. Inventory management

Suppliers manage their inventory, ensuring they have sufficient stock to meet demand. This would require them to forecast demand, order appropriate quantities of raw materials, find better options for raw materials, and store them efficiently.

4. Sales channels

Generally, suppliers sell their products or services to businesses, a business-to-business transaction. They may supply directly to manufacturers through physical stores or online platforms. 

5. Pricing

Suppliers negotiate prices with buyers depending on production costs, market demand, and profit margins.

6. Order fulfillment

When a business places an order, suppliers fulfill it by packaging and arranging for shipment or delivery. They are responsible for ensuring products arrive on time and in good condition. 

Read More: Best Inventory Management Software

Supplier Responsibilities

Suppliers are vital in the product life cycle as the manufacturing processes depend on their quality and timely inputs. Let us go through their responsibilities within the supply chain and business relationships.

1. Quality Assurance

The quality of the end product depends on the quality of the raw materials and components. Suppliers must ensure the quality and consistency of products or services to meet agreed-upon standards and specifications.

2. Timely delivery

Delivering products or services within the agreed-upon timeframe. Delays will impact the entire production cycle. 

3. Communication

Maintaining clear communication to provide updates on orders, deliveries, and any relevant changes.

4. Inventory management

Managing stock levels efficiently to prevent overstock or shortages.

5. Pricing and negotiation

Offering competitive and transparent pricing, negotiating contracts and terms to reach mutually beneficial agreements with buyers.

Besides these, suppliers are also responsible for 

• Adhering to legal and industry-specific regulations 
• Providing customer support by handling inquiries and complaints
• Offering innovative options to stay updated with market trends
• Implementing strategies to assess and mitigate potential risks in the supply chain

Types of Suppliers

Broadly, there are two types of suppliers: product and service. Manufacturers rely on these suppliers to deliver high-quality tangible items and invaluable expertise and solutions to create products as per market demand. 

1. Product suppliers

The product suppliers may either supply raw materials or components. They may be wholesale distributors, subcontractors, importers, or manufacturers.

2. Raw Material Suppliers

Raw material suppliers provide the essential material for creating finished products, such as metals, plastics, fabrics, or chemicals. 

3. Component Suppliers

Component suppliers provide specific parts or components integrated into the end product during manufacturing. These components can range from electronic parts in technology devices to mechanical components in machinery. 

4. Service Suppliers

Service suppliers offer expertise and specialized solutions across various domains. They contribute their unique skills to increase business efficiency. 

For instance, 

• Consulting firms IT service providers 
• Marketing agencies
• Legal experts 
• Financial advisors

Role of suppliers in the supply chain

During the COVID-19 pandemic, we have witnessed the repercussions of disruption in the supply chain. Suppliers were forced to minimize operations severely, and the impact was felt throughout the supply chain until the consumer.

Suppliers are at the top of the supply chain network. The entire network would collapse without the suppliers providing the inputs of raw materials or services. Suppliers are the source for the manufacturers. Without them, no goods would be produced to be delivered to the consumers.

A supplier plays several roles in the supply chain. 

Common Misconceptions

There are several misconceptions about vendors and suppliers that can understanding, decision-making, and interactions within the supply chain. 

It is best to clarify a few common myths about vendors and suppliers.

Myth 1: Vendors and suppliers are interchangeable terms

Fact: Each has specific attributes that make them unique. The vendor is the ultimate supply chain link, and the supplier is the first. Suppliers function in the product life cycle and affect the quality of the product. On the other hand, vendors sell the end product to the consumers and affect your sales and brand.

Myth 2: Both vendors and suppliers are solely responsible for physical goods.

Fact: Their scope can go beyond tangible items by providing services, expertise, or digital goods.

Myth 3: Relationships with vendors and suppliers are straightforward transactions.

Fact: Business relationships with vendors and suppliers are complex. The nuances of negotiations, contracts, and communication with them define your cost, product quality, and customer satisfaction. 

Myth 4: Businesses need one good supplier and vendor.

Fact: Relying heavily on a single source for raw materials or a vendor for sales is risky. Businesses need to diversify their sources and vendors to mitigate potential disruptions.

Myth 5: All suppliers and vendors are the same.

Fact: Businesses need to assess their sources individually as the quality, reliability, pricing, and level of service may vary. 

Vendor and Supplier Relationships in Various Industries

Vendor and supplier relationships are the lifeblood of various industries. Due to their roles, vendor relationships are more focused on price comparisons, whereas supplier relationships align with the influences on the quality of the product.

Here are a few examples of how this relationship spells out in various industries. 

1. Manufacturing sector

Manufacturers rely heavily on raw materials and components. For instance, the automotive industry thrives on good relationships with suppliers who provide everything from engines to electronics to assemble high-quality vehicles.

2. Technology sector

Businesses collaborate with suppliers to deliver microchips, displays, and other components. The efficiency of these collaborations influences product launches.

3. Retail sector

Vendors are instrumental in providing various products that cater to consumer needs. Vendors are exposed to the market trends and help businesses in market research for their products.

4. Fashion industry

The fashion industry, for instance, relies on relationships with fabric suppliers and manufacturers to create the latest trends.

5. Service sector

All businesses rely heavily on suppliers providing services, for example, essential services like housekeeping, water, and electricity, to technology service suppliers like consultancy and software solutions. 

Across these diverse industries, strong vendor and supplier relationships guarantee a smooth flow of goods and services. It also promotes innovation and improves the overall quality of products and customer experiences. Therefore, vendor management processes are crucial to building and maintaining strong vendor relationships. 

What is vendor management?

Vendor management encompasses business processes to interact, coordinate, build, and strengthen vendor relationships. Effective vendor management aims to maximize the value of the goods or services received from vendors while minimizing risks, costs, and inefficiencies.

Vendor management typically includes 

• Sourcing and selecting vendors 
• Negotiating contracts 
• Managing vendor performance 
• Assessing risks
• Ensuring compliance with contractual agreements and regulatory requirements. 

Managing vendors effectively also reduces the risk of supply chain disruption and ensures the delivery of goods on time and to the expected standards. 

You can strategize vendor management by applying best practices and investing in vendor management software to automate processes. 

Vendor management strategies

Vendor management can become complicated as it spans several teams of your organization and often involves executive oversight. However, there are strategies that teams of all sizes can implement to handle vendor management more effectively. 

Impact on Supply Chain Dynamics

Any disruption in the vendor activities will directly impact the consumer. Thus, vendor management is a crucial component of a successful supply chain. Effective vendor management can profoundly influence the supply chain dynamics.

Many of the benefits of vendor management are interlinked and help in the supply chain dynamics.

For instance, 

• Cost efficiency is achieved through negotiated contracts and bulk discounts, positively impacting the bottom line. 
• Collaborative vendor relationships foster innovation and integration of new technologies and techniques into the supply chain. 

In this regard, the below concepts bear additional consideration. 

• Vendor relationships on supply chain efficiency
• Vendor performance metrics.

Vendor relationship on supply chain efficiency

Building lasting and meaningful relationships with vendors can positively impact vendor performance. 

Improved vendor performance means

• Streamlined flow of goods
• Timely deliveries 
• Accurate demand forecasting
• Reduced wastage
• Optimizing inventory levels
• Minimize disruptions
• Faster issue resolution and collaborative problem-solving

All these ultimately improve overall supply chain efficiency.

Vendor Performance Metrics

How do you measure if the vendors deliver as per expectations and meet business goals? 

You will need Key Performance Indicators (KPIs) to measure vendor performance. KPIs vary according to an organization’s priority while evaluating vendor performance. 

For example,  relationship management –  a measure of the vendor’s commitment, flexibility, and innovation, is used as a quantitative and qualitative benchmark to establish KPIs and measure ROI.

On the other hand, supplier relationships also require a lot of attention. You must manage suppliers efficiently. 

Must Read: Best Vendor Payment Management Software

What is supplier management?

Supplier management is a structured process that enables you to identify, qualify, onboard, transact, and collaborate with suppliers to fit your business requirements. 

Effective supplier management would require you to develop techniques to

• Source and select suppliers
• Negotiate contracts
• Maintain relationships with suppliers
• Manage risk efficiently
• Regularly evaluate performance

This can help you build trust and have the supplier on your side. 

Supplier management strategies

One of the most crucial supply chain lessons the pandemic has given is that supplier management is critical, but you must create effective strategies to make it happen.

A few essential components to create a supplier management strategy for your business.

Impact on Supply Chain Dynamics 

Supplier management must emphasise on collaboration and quality aspects to positively impact supply chain dynamics.

Supplier Collaboration on Supply Chain Resilience 

Collaboration leads to goal-oriented partnerships that help in taking an integrated approach to building a resilient supply chain by 

• Redesigning processes together to reduce waste and redundant effort 
• Jointly purchasing raw materials
• Collaborating in forecasting, planning, and capacity management

Supplier Quality and Supply Chain Performance

Supplier management processes help improve supplier quality by facilitating 

• Selection of the right supplier
• Setting and enforcing quality standards
• Monitoring supplier performance
• Corrective action when the need arises

A well-structured and high-quality supplier network is the foundation for a positive supply chain performance. Hence, selecting suppliers and vendors is critical for your business.

How do you select vendors and suppliers?

A robust selection process is essential for procurement and project management. Poor vendor and supplier selection will have negative consequences for your business. 

Below are steps to successfully select vendors and suppliers.

• Define and analyze business requirements
• Define the product, material, or service needed, technical and business requirements, and vendor requirements.
• Conduct market research to identify potential vendors and suppliers
• Evaluate them based on experience, reputation, financial stability, quality, capacity, and references
• Send out Request for Proposal (RFP) or Request for Quotation (RFQ) to shortlisted candidates and evaluate received proposals
• Conduct site visits and briefings
• Negotiate terms, prices, delivery schedules, and other relevant aspects
• Check references
• Draw a detailed contract spelling out all the terms 

Factors to consider when selecting vendors and suppliers

For mutually beneficial partnerships with vendors and suppliers, it is critical to assess these aspects for each. 

Factors to evaluate before   vendor selection	Factors to evaluate before supplier selection
Quality control	Quality of raw materials supplied
Financial strength	Track record for reliability and consistency
Technological capabilities	Financial stability
Ability to provide timely deliveries	Capacity and price competitiveness
Market research and reputation	Logistical capabilities
Communication and responsiveness	Reputation, references and risk management strategies

Vendor vs supplier evaluation criteria

Evaluating a vendor is transaction-focused while evaluating a supplier involves a more comprehensive, strategic, and long-term perspective. 

1. Evaluation criteria for vendors

• Product/service focus: Revolves on the quality, functionality, and suitability of products 
• Transaction-based: Involves assessing timely deliveries, meeting specifications and quality standards
• Pricing: Vendors are assessed around individual transactions and pricing structures
• Reliability: Involves evaluation of reliability in delivering orders

2. Evaluation criteria for suppliers

• Strategic partnership: Focuses on long-term, strategic partnerships
• Holistic relationship: Involves a broader perspective including factors like innovation capabilities and adaptability to changing needs
• Risk management: Includes assessing risk management strategies, especially regarding supply chain disruptions
• Collaboraion and innovation: Includes assessing their willingness and ability to contribute ideas and innovations to benefit buyer
• Long-term impact: Assessing supplier’s impact on the business in the long run

As you have now completed the process of selecting vendors and suppliers to fit for your business, let’s now understand how to procure services and goods from them. 

The procurement process

A procurement process muststreamline a company’s operations to ethically purchase quality raw materials, goods, and services from suppliers/vendors to realize business objectives of saving cost, reducing time, and improving profitability. 

It involves identifying, sourcing, and purchasing goods from a third-party vendor or a supplier. This process would involve research, negotiations, stock orders, and final audits. 

1. Procuring from Suppliers

Procurement from suppliers is a strategic process that directly impacts the quality and cost of the goods manufactured or services provided. The procurement process is complex but vital, from identifying needs and sourcing suppliers to negotiating contracts and ensuring timely deliveries. The process of procuring from suppliers depends on the size and type of business. You must tailor the process to your business to ensure maximum efficiency.

2. Procuring from Vendors

Vendors are key stakeholders in the procurement process. They are responsible for purchasing items from manufacturers, typically in large quantities, and reselling them to businesses or consumers. It becomes very critical to find the right vendor for your business. 

Read About: TOP 10 Procurement Software Solutions

Steps in procurement process

When it comes to the procurement process, there is no one-size-fits-all approach for businesses. We will take you through key steps that will help you document a customized process to meet your needs. 

1. Identify goods or services needed: Consider quantity, quality, and specifications of goods and services, and budget constraints 
2. Vendor/Supplier identification: Research and identify potential suppliers to meet your requirements
3. Negotiate contract terms with the selected vendor/supplier: Negotiate terms and conditions that are mutually beneficial
4. Finalise the purchase order: Issue a purchase order detailing the agreed-upon terms and specifying delivery dates, quantities, and prices. 
5. Goods/services inspection: Inspect received goods or services and address discrepancies with the supplier 
6. Invoice approval and payment and document records: Approve supplier invoices for payments as per contractual terms and maintain records 
7. Vendor/supplier performance evaluation: Evaluate based on quality, delivery time, responsiveness, and adherence to contract terms and provide feedback

Challenges in procurement process

In today’s competitive and dynamic global world, the procurement process faces many challenges to maintain a smooth end-to-end procurement process. Let us try and understand the most common procurement challenges faced by organizations. 

1. Vendor/Supplier management

Selection of vendors and suppliers should be align with your business needs, flexible, and adapt to changing market demands. Procurement managers face the challenge of creating long-term relationships while keeping costs reasonable and efficiency high.

2. Invisible or ghost spending

Ghost spending happens within the business when orders are placed accidentally regularly. Also, if your order timing is incorrect, you will have orders rushed and pay extra for them. These holes will have to be plugged into the procurement process.

3. Risk management

The possible risks in procurement are order delivery risks, cost and quality risks, market risks, and fraudulent activity. The procurement process should include risk mitigation strategies.

4. Inaccurate data

Inaccurate, manual, and outdated data can adversely affect the execution of the procurement process. Implementing advanced tools to obtain accurate data will enable management to make informed decisions for better inventory management. 

Procurement software solutions can help overcome the above challenges. It links businesses with vendors and suppliers into one procurement platform.

Read More: How to Form a Successful Procurement Plan

Conclusion

Understanding the difference between vendor and supplier is crucial to modern-day supply chain management. While vendors provide finished goods to consumers, suppliers deliver essential raw materials and services critical for production. This differentiation is not merely semantic but forms the backbone of an efficient and resilient supply chain.

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