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What is a Preferred Vendor?

Mary McMahon
By
Updated May 16, 2024
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A preferred vendor is a vendor who has been investigated by a company and approved. When a company needs services, it turns to these vendors first, which means that being on the preferred list can put a business in a powerful position. As a general rule, only really large companies and institutions use preferred vendors, and people must apply to enter the preferred program.

There are several qualities a company looks for in a preferred vendor. Reputation in the industry is certainly important, as are issues such as on time performance, reasonable costs, and high quality of products and services. Vendors also need to be fully licensed, bonded, and insured, as applicable, with ample evidence of certification and experience in the area they specialize in.

Business practices at a vendor may also be important. A company which wants to promote sustainability, for example, will only use vendors with vetted environmental practices and a demonstrated commitment to environmental stewardship. Likewise, a religious company might prefer to use vendors which share its religious beliefs.

Many companies also expect some concessions from preferred vendors. By adding a company to a preferred list, a company is saying that this company will be its first resource for goods and services, and that it will not look elsewhere unless a vendor cannot provide the needed services. In return, a company may ask for discounts from the vendor, and for other special treatment, as the company considers itself to be a very important customer.

Some companies enter what is known as a preferred vendor agreement, a contract between a preferred vendor and the company which is intended to spell out the terms of the relationship. Having such a contract can be a very good idea, as it ensures that everyone understands what the expectations are, and it can lay the groundwork for legal recourse if a problem develops. This type of contract should be read carefully by both parties to confirm that there are no surprises in the terms of the contract.

The procurement department often manages relationships with preferred vendors, and it has a vendor list which it distributes to other departments. When people need something, they are expected to see if a vendor on this list provides it before looking at outside vendors.

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Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments
By live2shop — On Jun 23, 2011

A friend of mine now lives in Mississippi. This state has a very good program for preferred vendors, whose small business employs or is owned by a minority, for example, an ethnic minority or a woman. They are invited to fill out an application with personal information, and what products or services their company sells.

After investigation, they are given a certification for three years. They are put on a vendor database for state systems, such as school districts, to order products or services from.

By Clairdelune — On Jun 21, 2011

It's good business practice for companies to have a list of preferred vendors. They are all approved before a contract is signed. I think that the companies have the better advantage. They have a ready source for everything they might need. There may be more than one vendor on the list who might provide some similar services. Competition between vendors might become part of the picture.

Also, the company may have changes that make some supplies or services no longer needed. Then the vendor is out in the cold.

I'm sure that this preferred vendor system does work well most of the time.

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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