diff --git a/internal/exec/vendor_utils.go b/internal/exec/vendor_utils.go
index d2d5cd7a6..c4cb4f06f 100644
--- a/internal/exec/vendor_utils.go
+++ b/internal/exec/vendor_utils.go
@@ -153,7 +153,8 @@ func ReadAndProcessVendorConfigFile(
 
 			if !u.FileExists(pathToVendorConfig) {
 				vendorConfigFileExists = false
-				return vendorConfig, vendorConfigFileExists, "", fmt.Errorf("vendor config file or directory '%s' does not exist", pathToVendorConfig)
+				u.LogWarning(cliConfig, fmt.Sprintf("Vendor config file '%s' does not exist. Proceeding without vendor configurations", pathToVendorConfig))
+				return vendorConfig, vendorConfigFileExists, "", nil
 			}
 
 			foundVendorConfigFile = pathToVendorConfig
diff --git a/pkg/vender/vendor_config_test.go b/pkg/vender/vendor_config_test.go
new file mode 100644
index 000000000..a37bf2696
--- /dev/null
+++ b/pkg/vender/vendor_config_test.go
@@ -0,0 +1,144 @@
+// The package name `vendor` is reserved in Go for dependency management.
+// To avoid conflicts, the name `vender` was chosen as an alternative.
+package vender
+
+import (
+	"os"
+	"path"
+	"testing"
+
+	"github.com/stretchr/testify/assert"
+
+	e "github.com/cloudposse/atmos/internal/exec"
+	"github.com/cloudposse/atmos/pkg/schema"
+)
+
+func TestVendorConfigScenarios(t *testing.T) {
+	testDir := t.TempDir()
+
+	// Initialize CLI config with required paths
+	cliConfig := schema.CliConfiguration{
+		BasePath: testDir,
+		Components: schema.Components{
+			Terraform: schema.Terraform{
+				BasePath: "components/terraform",
+			},
+		},
+	}
+	cliConfig.Logs.Level = "Trace"
+
+	// Setup test component directory
+	componentPath := path.Join(testDir, "components", "terraform", "myapp")
+	err := os.MkdirAll(componentPath, 0755)
+	assert.Nil(t, err)
+
+	// Test Case 1: vendor.yaml exists and component is defined in it
+	t.Run("vendor.yaml exists with defined component", func(t *testing.T) {
+		// Create vendor.yaml
+		vendorYaml := `apiVersion: atmos/v1
+kind: AtmosVendorConfig
+metadata:
+  name: test-vendor-config
+spec:
+  sources:
+    - component: myapp
+      source: github.com/cloudposse/terraform-null-label.git//exports?ref={{.Version}}
+      version: 0.25.0
+      included_paths:
+        - "**/*.tf"
+`
+		vendorYamlPath := path.Join(testDir, "vendor.yaml")
+		err := os.WriteFile(vendorYamlPath, []byte(vendorYaml), 0644)
+		assert.Nil(t, err)
+
+		// Test vendoring with component flag
+		vendorConfig, exists, configFile, err := e.ReadAndProcessVendorConfigFile(cliConfig, vendorYamlPath)
+		assert.Nil(t, err)
+		assert.True(t, exists)
+		assert.NotEmpty(t, configFile)
+
+		// Verify the component exists in vendor config
+		var found bool
+		for _, source := range vendorConfig.Spec.Sources {
+			if source.Component == "myapp" {
+				found = true
+				break
+			}
+		}
+		assert.True(t, found, "Component 'myapp' should be defined in vendor.yaml")
+
+		// Clean up
+		err = os.Remove(vendorYamlPath)
+		assert.Nil(t, err)
+	})
+
+	// Test Case 2: No vendor.yaml but component.yaml exists
+	t.Run("component.yaml exists without vendor.yaml", func(t *testing.T) {
+		// Create component.yaml
+		componentYaml := `apiVersion: atmos/v1
+kind: ComponentVendorConfig
+metadata:
+  name: myapp-vendor-config
+spec:
+  source:
+    uri: github.com/cloudposse/terraform-null-label.git//exports?ref={{.Version}}
+    version: 0.25.0
+`
+		componentYamlPath := path.Join(componentPath, "component.yaml")
+		err := os.WriteFile(componentYamlPath, []byte(componentYaml), 0644)
+		assert.Nil(t, err)
+
+		// Test component vendoring
+		componentConfig, compPath, err := e.ReadAndProcessComponentVendorConfigFile(cliConfig, "myapp", "terraform")
+		assert.Nil(t, err)
+		assert.NotNil(t, componentConfig)
+		assert.Equal(t, componentPath, compPath)
+
+		// Clean up
+		err = os.Remove(componentYamlPath)
+		assert.Nil(t, err)
+	})
+
+	// Test Case 3: Neither vendor.yaml nor component.yaml exists
+	t.Run("no vendor.yaml or component.yaml", func(t *testing.T) {
+		// Test vendoring with component flag
+		vendorYamlPath := path.Join(testDir, "vendor.yaml")
+		_, exists, _, err := e.ReadAndProcessVendorConfigFile(cliConfig, vendorYamlPath)
+		assert.Nil(t, err)
+		assert.False(t, exists)
+
+		// Test component vendoring
+		_, _, err = e.ReadAndProcessComponentVendorConfigFile(cliConfig, "myapp", "terraform")
+		assert.Error(t, err)
+		assert.Contains(t, err.Error(), "does not exist")
+	})
+
+	// Test Case 4: No component specified with vendor.yaml
+	t.Run("no component specified with vendor.yaml", func(t *testing.T) {
+		// Create vendor.yaml
+		vendorYaml := `apiVersion: atmos/v1
+kind: AtmosVendorConfig
+metadata:
+  name: test-vendor-config
+spec:
+  sources:
+    - component: myapp
+      source: github.com/cloudposse/terraform-null-label.git//exports?ref={{.Version}}
+      version: 0.25.0
+`
+		vendorYamlPath := path.Join(testDir, "vendor.yaml")
+		err := os.WriteFile(vendorYamlPath, []byte(vendorYaml), 0644)
+		assert.Nil(t, err)
+
+		// Test vendoring without component flag
+		vendorConfig, exists, configFile, err := e.ReadAndProcessVendorConfigFile(cliConfig, vendorYamlPath)
+		assert.Nil(t, err)
+		assert.True(t, exists)
+		assert.NotEmpty(t, configFile)
+		assert.NotNil(t, vendorConfig.Spec.Sources)
+
+		// Clean up
+		err = os.Remove(vendorYamlPath)
+		assert.Nil(t, err)
+	})
+}