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Retail Value Chain 101: Why Suppliers Need Internal Audit Processes that Mimic Those of Retailers

Posted By Administration, Thursday, October 19, 2017
Updated: Wednesday, October 18, 2017


The Retail Value Chain 101 article for retailers from this issue of RVCF Link discusses the keys to building and maintaining an effective communication program with suppliers. Of course, proactive communication is not the sole responsibility of any single party. We often see suppliers make two mistakes when communicating with their retailer customers. First, suppliers tend to wait until there's a problem – typically, chargebacks – to contact the retailer.

Second, suppliers are often quick to point fingers at retailers and look for settlements or reversals before working out the kinks within their own organization. For example, suppose a supplier is hit with repeated chargebacks for the same compliance violation. They schedule a visit to the retailer's distribution center to watch one of their shipments being audited. How embarrassing would it be to sit there in front of the retailer as an audit reveals multiple errors, validates all chargebacks, and shows exactly how disruptive these problems are to the retailer's operations? To be clear, visits to retailer distribution centers are highly encouraged because they can open the supplier's eyes to the problems caused by shipping errors and help them correct these issues. But nobody enjoys public shaming.

Before approaching the retailer about problems, particularly with chargebacks and failed audits, suppliers need to know they're doing what they should be doing to satisfy retailer requirements. This is accomplished through the implementation of a formal supplier audit process that ensures shipment integrity by auditing both inbound shipments from the factory and the supplier's own outbound shipments to retailers.

Not only should suppliers have their own audit processes in place, but they should be modeled after retailer audit processes to ensure consistency. Many retailers have audit processes for new vendors, new EDI implementations, cross dock qualification, quality checks, etc. Obviously, every supplier should be working hard to pass these audits. That's how you stay on cross dock, preferred vendor, and other advantageous programs. And the less humans have to inspect, correct, or otherwise touch a shipment, the better.

Retailers typically spot check a certain percentage of cartons for quality. Do tickets have accurate information? Do products intended to be hung have hangers? Do folded products have size strips? Do prepacks have the proper size scale? If a minimum accuracy threshold isn't met, more cartons are checked. If those cartons fail the audit, further escalation is required, and an entire purchase order or shipment might need to be checked. Nobody wants to be moved to full manual processing, which is time-consuming and costly.

Failed audits cause shipping delays that result in out-of-stocks, lost sales, markdowns and reduced profits. Retailers are forced to waste time and money to correct these problems. As a result, chargebacks are issued to suppliers, often resulting in friction in the trading partner relationship.

Best practice for suppliers is to emulate the audit processes of retailers, especially if the supplier is bringing in goods from overseas, to ensure the integrity of carton contents and floor ready compliance.

When bringing in goods from overseas, the supplier often seeks to improve speed to market and cost efficiency by having the factory pack the goods for cross dock through their distribution center and the retailer's distribution center. If it's not possible to pack for cross dock, the supplier may still choose to have certain value-added services handled by the factories, such as pre-ticketing, hanger application, sizer or size strip application, and RFID or EAS application.

Look at retailer programs holistically and develop a single program that averages the number of cartons checked, the percentage of accuracy required, etc. For example, if a supplier's largest retailer partners routinely audit an average of two cartons per PO and require 98 percent accuracy to achieve cross dock status, the supplier should be following the same processes and holding the factory to the same standards. If two cartons fail, check "x" number of cartons. If those fail, a full audit should be required.

Auditing factories for shipment integrity should be followed with chargebacks for non-compliance, which should be spelled out in the agreement with the factory. Just like suppliers should visit retailer distribution centers, factories should also be visited to ensure their processes are aligned with supplier processes. The same holds true for third party logistics providers.

Suppliers should also be auditing their own outbound shipments and proactively addressing any issues uncovered. Are cartons packed correctly? Are tickets applied and cartons labeled properly? Are trucks loaded correctly?

Once the supplier has audited both inbound shipments from the factory and outbound shipments from its own facility, the supplier can visit retailer distribution centers with confidence and determine if a retailer's processes could be contributing to chargebacks and/or performance scores.

A wise person once said, "Delay is the death of the sale." That's a painful fact in the world of retail. The downstream effects of failed audits are very real and very serious. Delays can be minimized if not eliminated when suppliers implement internal audit processes modeled after retailer audit processes. That's the only way to ensure a reduction in chargebacks, the fast arrival of goods to sales floors, and future orders and replenishment while minimizing the risk of lost sales and profits.

CLICK HERE to return to the OCTOBER 2017 RVCF LINK

Tags:  Audit  Order Accuracy  Quality Control 

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