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Beyond Chargebacks:
The Value of Compliance Data

2/26/2013
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4/21-23/2013
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Vendor Compliance Data as a Strategic Asset (Part I)
By Sonia Parekh, PRGX

For retailers today, it's easy to lose a sale. Customers are informed and impatient – and if they don't find what they are looking for on the shelf, they can turn to their phones and make a purchase from another retailer before they even walk out the doors of your store. Because vendor compliance issues can play a big role in why the products are not on the shelf at the right time, now more than ever before, they can lead to lost sales or even lost customers.

Traditionally, compliance data has been used to identify instances of non-compliance so that chargebacks could be issued to offset the additional cost of receiving and processing the order. Of course, the hope is that the charges also incent the vendor not to make the mistake again. In some cases, compliance statistics are included as a part of the vendor scorecard and shared with the vendor during the overall performance review. Including compliance on the scorecard helps everyone see the accountability for compliance the same way they see the accountability for sales and profits. In some cases, retailers actually calculate lost sales that result from non-compliance and share this information with vendors. Though this method of compliance enforcement is probably the most important and effective, it is not done broadly as a standard practice today.

Consider a new, more strategic use for vendor compliance data. Building on the idea of calculating the lost sales that result from non-compliance, you can also think about looking at the overall impact of non-compliance issues for one vendor over a given period. You can use this type of data to run robust analyses that can tell a much more compelling story than chargebacks or even a vendor scorecard.

Vendor compliance data analyses can help retailers and vendors prioritize the operational issues that should be addressed in order to drive the biggest impacts to sales. For example, let's say you have a cashmere sweater program and while you currently have three vendors supporting the program, next year you plan to source it entirely to Vendor X, whom you feel produces the best sweaters. But when you review Vendor X's compliance record, it appears that over the past year 25% of their receipts have had compliance issues, which is significantly higher than the category average of 12%. This information may lead you to feel that sourcing such a large and important program to Vendor X could be a risk. However, upon further analysis you find that 8% of Vendor X's issues were due to missing ASN's and another 6% were due to invoicing problems. Once you share this information with Vendor X and they understand that these issues are putting their future business with you at risk, they agree to do full investigation into these areas and resolve the issues. If this effort is successful, next year Vendor X should have no more than 11% of their receipts with compliance issues. This puts them below the category average and significantly reduces the risk of awarding them the cashmere program. In addition, Vendor X has a better understanding of where to focus their time and money so they can solve the operational issues that are having the biggest impact.

Vendor compliance analyses can also be used to support merchants in merchandise and vendor planning. For example, let's say you are reviewing vendor performance in order to establish vendor plans for the upcoming year. You find that Vendor Y had been planned at $1 million, however they only achieved sales of $800,000. Before thinking about planning Vendor Y as a decrease for the upcoming year, review the lost sales that resulted from vendor compliance issues. In this case, let's say you find that Vendor Y had $250,000 in lost sales due to compliance issues. Now you can go to Vendor Y and talk about those issues and what they might be able to address going forward. With that information, you may decide not to plan Vendor Y down after all.

Finally, vendor compliance analyses may be used to support other functional groups outside of merchandising. Within a retailer, there are many functional groups that make decisions involving or affecting vendors. The marketing and creative teams are often involved in picking merchandise for the cover of a catalog or the homepage of a website. Sharing vendor compliance reports with these groups can help ensure that they do not choose to feature a vendor that has significant compliance issues and may miss the catalog drop date or the homepage go live date. Or, as in the above examples, you can share the information with the vendor and get them to commit to resolving compliance issues before they are featured in such a prominent position. Being on the cover of a catalog can be highly motivating!

Using vendor compliance data to drive retailer-vendor collaboration is a win/win for both parties. Sales are something that everyone can align with and having data that shows you where to focus your efforts in order to maximize sales is a productive way for both retailers and vendors to approach compliance. Turn your vendor compliance data into a strategic asset and drive more sales!

For more information on taking your compliance data to the next level, look for our article next month on how to aggregate and analyze your data so that you can run more strategic analyses.

Sonia Parekh
Sonia Parekh is a Principal in PRGX's Business Analytics and Advisory Services Division. She has an extensive retail background that includes merchandising experience in the department store, specialty and discount sectors of retailing. She has also managed merchandise categories for leading brick and mortar, catalog and online retailers. Sonia has consulted with many clients to improve profitability by taking a customer-centric point of view and leveraging data for strategic decision making. She has a deep understanding of how to drive vendor-retailer relationships that are a win for the end consumer. Sonia has a B.S. in Economics from the Wharton School of Business and an MBA from the University of Michigan.

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