How to Make Vendor Compliance Programs Work For You

Of all the strategies for reducing costs in your business, vendor compliance programs may be the most underdeveloped. A well thought-out, formal vendor compliance program can reduce supply chain logistics costs, reduce 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 charge-backs for vendors' non-compliance.

Without a formal vendor compliance program, your supply chain logistics has no recourse but to absorb both direct and hidden costs for noncompliance. Without compliance it is impossible for a merchant to implement advanced supply chain systems, ASNs, just-in-time inventory, source marking and ticketing, or RFID programs. A good vendor compliance program will not only avoid pitfalls but will reduce the time spent dealing with vendor disputes, claims, and charge-backs.
READ: 23 Ways to Improve Your Inventory Management Processes 

Merchants are sometimes leery that more comprehensive accounting and charge-back 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. Anyway, 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 program 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 (reduce backorders) and inbound routing guides (reduce freight costs). Take, for example, late delivery of receipts, a major cause of backorders. Backordered merchandise costs most companies $15 to $20 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 surely not the way to reduce freight 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: supply chain logistics (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 the lack of a vendor compliance program, or that you want to reduce expenses in your supply chain logistics, you can go about laying out a strategy that addresses these problem areas.

The Vendor Compliance Manual
Some of the typical policies, requirements and charge back schedules that are included in a fully developed vendor compliance 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 POs, ASNs, etc.)
    • Master pack and inner pack sizes
    • Case labeling guidelines
    • Accounting and paperwork requirements
    • Supply chain logistic requirements
    • Routing guides to reduce freight costs
    • Scheduling appointments
    • Cross-docking requirements
    • Direct-to-store requirements
    • Drop-ship instructions
    • Schedule of charge-backs for noncompliance
    • Customer return of merchandise and credits
    • Contact list, including merchandising, distribution center, accounts payable, drop-ship orders, and inventory control
READ: 14 Inventory Best Practices to Implement in Your Company

Vendor Charge Backs to Consider
As you develop a charge back schedule that penalizes the vendors for not adhering to procedures, how do you decide what is a fair or representative charge back cost? In working with many businesses on inventory management consulting projects, we have 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 charge backs 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 charge backs where vendors are generally compliant. Whatever your policy is, you have to educate your supply chain logistics' staff and they have to report the non-compliance reasons and scope (problem, units effected, etc.). So make it easy for them to understand and administer.

Charge-back categories used in a midsize 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 cross-dock-to-store requirements
    • Bill of lading not complet
    •  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 merchandis
    • 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.