The topic of value-added services (VAS) continues to be an area of interest for merchandise suppliers. Suppliers are concerned with the costs associated with providing VAS to retailers and the time and labor required to meet these requirements as well as the possible consequences of not providing VAS.
VAS refers to various services that a supplier will provide to ensure that a product arrives at the store "shelf-ready" or can be immediately shipped directly to a consumer. By creating efficiencies in the flow of goods, VAS can increase speed to market and reduce out-of-stocks and markdowns. For example, if a supplier has already applied price tickets, hangers and sizers to a garment, the cartons can be cross-docked through the retailer's distribution center. Store associates can then open the cartons and immediately place merchandise on shelves or racks.
Standard VAS include applying retail price tickets, hangers, sizers and polybags; affixing GS1-128 labels, content labels, and packing lists/slips to cartons; and trading common EDI documents. Newer or more costly VAS include radio frequency identification (RFID), security tagging, customized tickets beyond industry standards, and customized labels or packing lists.
The obvious concern among suppliers is cost. Suppliers must pay for items like hangers, polybags, ticket stock and ink for printing tickets, or pay an outside vendor to print tickets. They have to dedicate time and resources to applying sizers to hangers, hangers to garments, and labels to cartons. Omni-channel is further complicating the situation because a retailer will have different requirements for brick-and-mortar, catalog and e-commerce, and direct-to-consumer orders. For example, a shirt going to a store will require a hanger and sizer, while a shirt going directly to a consumer will require a polybag but no hanger or sizer.
Requirements can be very specific and often vary from retailer to retailer. However, the expectation is that suppliers will provide these services so the merchandise arrives in the hands of the consumer as quickly as possible.
Results from the RVCF VAS Survey
Retail Value Chain Federation (RVCF) conducted a Merchandise Supplier VAS Survey in 2013 to dig deeper into how suppliers are handling VAS and what they are doing to recuperate VAS costs.
Our survey found that 69 percent of surveyed merchandise suppliers track VAS costs. 70 percent of those tracking costs use this information for trade spending negotiations with retailers and 73 percent include VAS costs in reporting customer profitability.
59 percent of suppliers are passing on the cost of VAS to retailers. More specifically, 83 percent pass on the cost of custom price tickets, 48 percent pass on the cost of hangers, 63 percent pass on the cost of RFID, and 41 percent pass on the cost of security tags. 80 percent of suppliers are passing along VAS costs by including them in the cost of the product, while just 20 percent are charging separately for VAS. Some suppliers do both.
Factors that affect evaluations of VAS requests include:
Review of past and projected sales
Cost analysis for supplies, time and labor
Size of the retailer
Channels of business (brick-and-mortar, e-commerce or catalog, direct-to-consumer)
Retailer requirements and associated chargebacks for non-compliance
Our survey found that standard VAS mentioned previously are typically provided by suppliers without issue and most suppliers will provide a service if a retailer associates a chargeback with the requirement to provide the service. However, more costly and complex services may require the supplier to negotiate with the retailer, seek an exemption from the retailer, or pushback to the retailer.
Reasons given for denying VAS requests include costs, the impact on the distribution center or factory, and the need for system or process modifications. Requests have also been denied when the request falls outside industry standards such as GS1 voluntary guidelines, the order size is insufficient, or the request involves closeout or discontinued items.
Causes for Concern
The price of RFID devices is generally more than that of typical VAS offered by suppliers, making it difficult for suppliers to support RFID initiatives. By requiring top-tier suppliers to implement RFID, retailers can take advantage of improved inventory control and visibility, theft deterrence, sales analysis and other benefits. But retailers are implementing RFID differently, using different devices with different data, making it virtually impossible for suppliers to derive the reverse benefits without a major systems upgrade. Such an upgrade isn't financially feasible in most cases.
Even though VAS is often cost-prohibitive for suppliers, they are under tremendous pressure to comply with retailer requirements for VAS. If suppliers can't obtain exemptions or negotiate out of VAS requirements, they are faced with non-compliance chargebacks and loss of business. With shrinking compliance departments, lack the time and staff to research chargebacks in a timely manner adds to the pressure.
Ship windows and "supply chain days" – the number of days between the time an order is placed and the time it is received at the retailer's distribution center – are also shrinking. As a result, suppliers have even less time to fill an order and still remain compliant with the retailer scorecards.
The Future of Value-Added Services
VAS are an important part of the retail supply chain and play a critical role in delivering the best possible experience to the end consumer. However, retail trading partners need to find common ground on these issues so VAS works for all parties.
VAS are increasing in number, complexity and cost, necessitating technology upgrades and system modifications. How will this trend affect suppliers? Will VAS benefit retailers, or retailers and suppliers? What will be the impact on distribution centers and factories with regards to training, application, space and process modifications? Will chargebacks increase or decrease?
The key to resolving these questions in a way that benefits both sides is collaboration. Suppliers need to keep their retailer trading partners abreast of capabilities related to VAS, the impact of VAS on systems and facilities, and vice versa. Additionally, they need to come to an understanding about supplier requirements and fairly negotiate the costs.
One of the benefits to RVCF membership is the collection and availability of survey data. We regularly conduct surveys and share data with members to encourage collaboration and solve industry problems. Our supplier members can view the full results of the Merchandise Supplier VAS Survey on the Supplier Only group page on the RVCF website.
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