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How to Make Vendor Compliance Programs Work for You
By Curt Barry, F. Curtis Barry & Company

Of all the strategies for reducing costs in your retail, catalog and e-commerce businesses, vendor compliance programs may be the most underdeveloped. A well-thought-out, formal vendor compliance policy can reduce warehousing and freight costs, speed up order processing, and lead directly to increased customer satisfaction. In order to achieve this it must spell out your requirements and the chargebacks for vendors' non-compliance.

Without a formal vendor compliance policy, the warehouse has no recourse but to absorb both direct and hidden costs for non-compliance. Without compliance it is impossible for a merchant to implement advanced supply chain systems, ASN's, just-in-time inventory, source marking and ticketing, or RFID programs. A good vendor compliance policy will not only avoid pitfalls but will reduce the time spent dealing with vendor disputes, claims, and chargebacks.

Merchants are sometimes leery that more comprehensive accounting and chargeback policies may upset vendor relationships they've worked long and hard to develop. Besides weighing that possibility against the probability that improved vendor compliance will reduce costs and improve customer service over time, you need to consider that a well-defined document in which requirements, expectations and penalties are spelled out will ultimately remove ambiguities, end misunderstandings and result in even better vendor relationships. If your vendors are dealing with large retail companies, they are already used to compliance policies.

Where Is Vendor Compliance Needed Most?
The first and most important step in developing a vendor compliance policy is to understand what's currently going on. You must analyze and agree internally on the areas of greatest concern. Two areas are almost mandatory for inclusion – on-time delivery (reducing backorders) and inbound routing guides (reducing transportation costs). Take, for example, late delivery of receipts, a major cause of backorders. Backordered merchandise costs most companies $7 to $12 per unit. This is absorbed across your business; for instance, in call center costs ("Where is my backorder?"), additional picking and packing, second outbound shipping expense, and loss of shipping and processing revenue offset. And to have vendors control shipping or not follow compliance routing is a sure way to significantly increase transportation costs.

When taking into account the cost of backorders, unacknowledged substitutions and other common vendor related problems and their impact on profitability, note that they affect many departments – operations (second and subsequent orders being picked and shipped), accounting (extra paperwork), marketing (loss of shipping and handling income), and merchandising (added time dealing with problem shipments and strained relationships).

As all departments have a stake in the problems, course of action and working with vendors, establishing and monitoring vendor compliance needs to be a team effort; they should all be accountable for developing and implementing the new procedures. Once everyone recognizes the costs you have to absorb because of a lack of vendor compliance or that you want to reduce from your operation, you can go about laying out a strategy that addresses these problem areas.

The Vendor Compliance Manual
The typical policies, requirements and chargeback schedules that are included in a fully developed manual used by larger companies are outlined below. Don't let this list be daunting. A good strategy is to start out with the policies that will give you the most benefits, cost savings and efficiencies. If you develop those requirements first, you can expand the manual in later seasons to be more comprehensive.

Vendor compliance manuals typically address these elements:

  • Company history, vision, and expectations for customers
  • Cost of backorders to the business
  • Service standards
  • On-time delivery to committed delivery date
  • Products delivered in proper condition and in agreed-upon manner
  • Product quality according to specs
  • Product packaging and polybag specs
  • Label marking for retail shipments vs. direct
  • Supply chain systems requirements (electronic PO's, ASN's, etc.)
  • Master pack and inner pack sizes
  • Case labeling guidelines
  • Accounting and paperwork requirements
  • Logistical requirements
  • Routing guides to reduce costs
  • Scheduling appointments
  • Cross-docking requirements
  • Direct-to-store requirements
  • Drop-ship instructions
  • Schedule of chargebacks for non-compliance
  • Customer return of merchandise and credits
  • Contact list including merchandising, distribution center, accounts payable, drop-ship orders, and inventory control

Chargebacks to Consider
As you develop a chargeback schedule that penalizes the vendors for not adhering to procedures, how do you decide what is a fair or representative chargeback cost? In working with many direct businesses, F. Curtis Barry & Company has developed rates per hour used (typically anywhere from $40-$50 per man hour) or a cost per infraction, which is $100 and higher in many larger companies. Admittedly, large retailers often look at chargebacks as a profit center. We want to emphasize that it's not the revenue generated that is important. Remember to stress with everyone, especially the vendors, that you'd rather have the receipts be compliant than whatever charges are levied. You may even waive chargebacks where vendors are generally compliant. Whatever your policy is, you have to educate your DC staff and they have to report the non-compliance reasons and scope (problem, units affected, etc.). So make it easy for them to understand and administer.

Chargeback categories used in a mid-size direct merchant's fully developed compliance manual include:

  • Improper PO number on carton or label
  • Wrong product sent
  • Product not labeled with SKU #
  • Style or product substitution without approval
  • Inbound receipt past cancellation date
  • Incorrect labels or placement of labels
  • Product not labeled with country of origin
  • Shipment lacks certificate of origin
  • Product specs not sent in advance of shipment
  • No photo sample
  • Merchandise not packaged according to specs, repackaging required
  • Early shipment without approval
  • Merchandise required 100% inspection
  • Mixed POs on pallet or in cartons
  • Mixed SKUs per carton
  • Failure to meet crossdock-to-store requirements
  • Bill of lading not complete
  • Shipment did not conform to routing guide
  • Late delivery, causing backorders
  • Merchandise damage not attributed to carrier
  • Did not ship in correct option
  • Incorrect placement of packing list, incomplete packing list, no packing list
  • Shipment on nonstandard pallet
  • Failure to protect fragile merchandise
  • Delivery to wrong address
  • Delivery without appointment

The Bottom Line
Managing vendor relations is an essential part of today's need for efficiency and cost control. Those direct merchants that ignore this potentially volatile aspect of their operations do so at their peril – while those with a seasoned, well-planned vendor compliance program can achieve significant savings.


10 Tips for Implementing Vendor Compliance Policies

  1. Make all stakeholders accountable for developing and implementing the new procedures.
  2. Agree on your vendor related problems and develop a specific strategy to change them.
  3. Take into account the cost of backorders across your business and their effect on profitability.
  4. Develop a chargeback schedule that imposes offsets to vendors for non-adherence, but stress that you'd rather have receipts be compliant than whatever charges are levied.
  5. Keep the policy as short as possible. Vendor compliance works best when companies clearly state consistent parameters and goals – and just as important, specific sanctions for non-compliance.
  6. Ask vendors to sign off on the policies as a condition for doing business with your company. Put the policies and procedures up on your website so vendors' departments can access them.
  7. Implement the policies over 3 months or longer. Use your meetings with vendors to educate them as to what you are doing and why. Give them time to implement within their companies, and during this startup time monitor performance and communicate how it's going within your company and with the vendors.
  8. Consider implementing initially with the vendors that would give you the most benefit (e.g., highest volume receipts or sales); then expand. Smaller vendors will have trouble implementing compliance and you may waive their participation.
  9. Use development of a vendor compliance policy to strengthen your vendor relationship. Communicate your business's direction, emphasizing the vendor's importance to you and what the potential is for them.
  10. Remember, your own DC personnel have to understand the policy and need simple and straightforward methods of reporting problems for resolution by the vendor.

Curt Barry, President, F. Curtis Barry & Company
Curt Barry is president of F. Curtis Barry & Company, a national consulting firm that works with catalog, eCommerce, and retail businesses focusing on distribution center operations, systems, freight analysis, and inventory management and control. Learn more online at www.fcbco.com/services. Curt Barry can be reached at cbarry@fcbco.com or 804-740-8743.

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