What is a Vendor? The Complete 2021 Guide

Sign up for our newsletter

Stay informed with the latest trends and best practices in finance and procurement.

Many companies and organizations rely on external vendors to help fill in their supply gaps and enable the continued operation of their business. Vendors are businesses outside the company that provide it with a service or product that it needs in exchange for money. In some cases, it can be a struggle to select the right vendor for the targeted purpose. This dilemma is notably the case when they’re engaged in place of an internal alternative or potential vertical integration strategy. Below, we will explain how to overcome that dilemma and choose the right vendor for a business’s needs. With the right vendor, a company can go from barely breaking even to exceedingly profitable.

This article will cover the following topics:

What is a vendor?
Types of Vendors and Examples Per Business Model
Categories of Vendors
Why are vendors important?
Vendor Strategy
How do vendors work?
Vendor Payment - What comes next?

What is a vendor?

A vendor is an entity that supplies goods and or services to businesses, individuals, or governments. Vendors provide goods to, or assist, businesses for a fee. For the most part, vendors sell things rather than manufacture them, though this is not always 100% the case. Companies of all sizes often rely on several vendors to supply their product(s) to their end-users. Though smaller businesses may rely only on a vendor or two, larger corporations and conglomerates can manage upwards of 150,000 vendor relationships.

Types of Vendors

Much like shoes, there is no such thing as “One Size Fits All” in the context of vendors. On the highest level, vendors can be dichotomized based on their target market, which can fall under businesses, individual consumers, or even governments. Below, we will cover the following major vendor types, along with examples for each.

Vendors that engage in a B2B, or Business to Business, model sell primarily to businesses, both large and small. Frequently, the goods dispensed by B2B vendors support the manufacture or inventory of their buyers’ products. Without B2B vendors, businesses ranging from Tesla to your nearby ‘Mom & Pop’ would be brought to a standstill.

Examples of B2B vendors:

Supply Wholesalers
Communication Tools
Spend Management
Task Management
Digital Notaries
Onboarding Services
Consulting Firms
Freelance Services
Outsourced PR

B2C

B2C vendors who engage in Business to Consumer operational models market their wares directly to individual end-users rather than to businesses. Products sold by B2C vendors are either completed products or specialty components. B2C vendors are present in both the physical and digital sales spaces.

Examples of B2C vendors:

Online Marketplaces
Bars & Restaurants
Department Stores
Streaming Services
Hardware Stores
Clothing Stores
Fast Food
Consumer Electronics
Used Car Lots

B2G

A B2G, or Business to Government vendor, is a vendor that sells directly to governments or government-run entities. B2G vendors may manifest themselves as military contractors, think tanks, policy analysts, or lobbyists.

Examples of B2G vendors:

Military Contractors
Policy Analysts
Lobbyists
Think Tanks
Research Institutes
Government Contractors
Weapon Vendors
Private Security
Public Sector Marketing

Categories of Vendors

Beyond the B2B, B2C, and B2G vendor types, vendors can be sorted into more specific categories that provide a clearer sense of what they do and where they fit in the broader supply chain. Within these categories, note that vendors possess a dual-nature - one that buys (then resells) goods and services and one that provides. These vendor categories are:

Manufacturers
Retailers
Service Providers
Wholesalers

What are Manufacturing Vendors?

What they do: Manufacturing vendors turn unprocessed resources into sellable products.
Who they sell to: Vendors that engage in manufacturing may sell their output to wholesalers, businesses, or end-users (usually in bulk).
How do they assist: Without manufacturers, a business’s supply chain would grind to a halt.

What are Retailing Vendors?

What they do: Retail vendors purchase their inventories either from wholesalers or directly from manufacturers.
Who they sell to: They resell these purchased products to the end-users.
How do they assist: Without retailers, end-users wouldn’t be able to buy anything.

What they do: Service-providing vendors offer their services in exchange for money.
Who they sell to: They usually satisfy the external needs of individuals or companies, like banking or janitorial work.
How do they assist: They provide services that individuals and businesses either cannot (or choose not to) perform in-house.

What they do: They purchase products from manufacturers.
Who they sell to: They resell their products to retailers (or distributors) for subsequent sale.
How do they assist: Wholesale distributors are middlemen. They don’t manufacture anything or provide any tangible service, but they’re essential. Without their bulk goods, many retailers and service providers wouldn’t be able to stay in business.

Why are vendors important?

Without vendors and the products they manufacture, wholesale, retail, and provide, consumers, businesses, and governments wouldn’t be able to acquire their needed goods. Moreover, if one vendor fails, for whatever reason, there must be backups available across every step of the supply chain. This protective redundancy is seen frequently in everyday life. Examples include when Google bought Waze to enhance its mapping data or when Microsoft acquired ZeniMax Media to bolster its first-party game library. Vendors are important thanks to the high value of what they provide in place of internal alternatives:

Services provided by vendors often come down to supporting functions that are not economically viable to engage with directly, such as manufacturing.
Goods provided by vendors are needed when a company cannot supply or develop these goods themselves.

Vendor Strategy

The strategy behind the use of vendors comes down to problem-solving. Specifically, if a business identifies a gap in its supply chain or inventory, it would be prudent to fill it via an external vendor. If vendors gain employment at random, then the potential for duplicated efforts and wasted money is high. In practice, vendor strategy falls into the following three steps:

Put together a strategy to improve your business
Identify vendors that meet your business’s strategic needs
Establish relationships with these vendors and engage in long-term vendor management

How do vendors work?

Though vendors are defined broadly, the exact nature of their workflow is more specific, depending on the type of vendor in question. However, given that a large number of vendors are manufacturers or wholesalers, they operate through the following process:

The buyer submits a purchase order to the vendor
The vendor fulfills & delivers the order
The vendor provides the buyer with an invoice
The buyer pays the vendor
The buyer uses the vendor’s goods or services to sell to the end-user

Vendor Payment - What comes next?

Learning everything you can about vendors, including what they are, their variants, and how they work, is just the beginning. Once you decide on the vendor(s) that best suits your needs, the conversation will turn towards pricing and payment.

Proper vendor management is important because it helps overcome the potential hurdles of overcharging and hidden fees, which have hobbled even the best and most productive vendor relationships. Luckily, PayEm can provide an easy way to reduce the risks and effectively manage vendors, all in one place.

With PayEm’s total spend & vendor management tools, you won’t have to worry about financial concerns like overcharging. Instead, you can focus your energy on ensuring that the goods/services you receive are up to snuff. Moreover, with our connected finance platform, you’ll be able to see everything in one place. For more information on PayEm’s solution or to schedule a demo, you can visit us here.