How Do I Develop and Implement a Vendor Compliance Program?

Managing vendor relations is an essential part of today’s ecommerce operations. Vendor compliance is a great strategy for reducing costs in your business. A well-thought-out, formal vendor compliance policy can:

• speed up order processing
• reduce warehousing and freight costs
• lead directly to increased customer satisfaction.

Vendor compliance is achieved when a merchandise vendor ships a retailer's purchase order in a manner that satisfies the retailer's requirements. These requirements, or business rules, are typically specified as a condition of the retailer-vendor relationship and the purchase order negotiated by the retailer.

Retailers issue chargebacks, or deductions, to a vendor’s invoices for non-compliant shipments. A chargeback is a fee that a retailer charges a vendor for errors and unauthorized changes in shipping the purchase order that does not follow the retailer’s business rules.

Chargebacks are often viewed as a retail profit center or a necessary cost of doing business. However, the reality is there are very real costs and delays in merchandise availability that result from non-compliance. The chargeback offsets the additional fulfillment center and accounting expenses the retailer incurs as a result.

Vendor compliance policies and agreements are retailer specific requirements that vendors must meet. This blog assists your company in understanding how to develop vendor compliance requirements that will work for your company.

What does non-compliance cost?

We discussed the cost of non-compliance recently with Kim Zablocky, Founder of Retail Value Chain Federation. For over 25 years, RVCF has acted as a leader dedicated to improving the retail-supplier relationship and meeting compliance standards. RVCF always focused on reducing, or even eliminating, retail compliance charge backs.

From RVCF’s retail-supplier surveys, Zablocky says,

“These types of charges have ranged from 0.25%-1.25% of the invoice, the average is 0.4% to 0.8% of one percent. So, let’s say your business does $300 million annually in gross sales. Using an average of 0.6%, that’s $1,800,000 in charges that need to be reconciled, disputed, or written off. All of which is costly and requires resources and labor.”

Zablocky went on to say,

“If you think it's only the major retailers assessing these charges, the regional retailers and ecommerce companies are also developing their own supplier performance management programs.

The average charge/deduction is $250-300 per occurrence, which could mean multiple deductions on a purchase order-invoice. This monetary dilution of your sales can easily eat away at your bottom line.

Sadly, some suppliers still look at these charges as the cost of doing business. That mindset doesn’t hold water. Small retailers have historically absorbed the costs without trying to implement compliance and we wonder how long this is feasible.”

Can you go another year absorbing these costs and merchandise delays?

Developing your vendor compliance policy

Developing a vendor compliance policy deals with more than just costs and charge backs. An equally important goal of the vendor compliance policy should be to have compliant receipts that move quickly through your center. Here are some best practices to consider:

1. Develop standards and policies:
   Vendor compliance policies should be developed by a committee of merchants and personnel from inventory control, fulfillment, and accounting. The problems and solutions are all their responsibilities, so get their input from the start.
   
   READ: How to Achieve Warehouse Efficiency Through Vendor Compliance
   
   
2. Determine what the cost of non-compliance is to your company:
   Do a detail assessment of the problems non-compliances causes in the fulfillment center, merchandising operations, and accounting department. Here are some examples from our operational assessments of what to assess:
   
   
   1. Lost sales and backorders: When vendors don’t deliver on time, it sometimes means lost sales and backorder costs. For most ecommerce businesses, backorder costs range from $15 to $20 per unit of product.
   2. Increased inbound freight costs: When vendors don’t conform to routing guides, it often increases freight costs dramatically. Identify the occurrence frequency, offending vendors, and subsequent costs.
   3. Delay in processing: A lack of standards can cause receipts to back up in receiving and put away, making them unavailable to fill customer orders. Consider what is causing receipts to be handled as exception processing and create standards to mitigate these issues.
   4. Unauthorized product substitutions: Sometimes vendors ship substitutions rather than the original product on the purchase order. Unauthorized substitutions may lead to lost sales and store display problems.
   5. Marking and packaging: Store packaging and pricing may be different than that of ecommerce goods. Vendor errors or omissions, such as price marking, delays processing and skews inventory available to process orders.
   6. EDI and processing systems: Major retailers, such as Amazon and eBay, and other selling portals are heavily dependent on EDI and electronic communication of purchase orders, advanced shipping notices (ASNs), invoices and vendor source marking with barcode. Non-compliance creates many problems with processing and paperwork.
   7. Paperwork and accounting standards: Non-compliance means more manual labor and exception processing to reconcile accounts and pay vendors.
   8. Scheduling transportation and receiving labor: ASNs give advance notice of receipts, which results in better fulfillment center labor planning and less truck congestion in the DC yard.
      
      READ: How to Make Vendor Compliance Programs Work for You
3. Focus on largest problems and costs:
   If you don’t have vendor compliance policies today, assess your current fulfillment and identify the problems that will bring the biggest immediate savings. These typically include:
   
   
   1. Meeting EDI and electronic document standards
   2. Routing guides
   3.  Labeling inbound cartons and pallets with product SKUs and purchase order numbers
   4.  Purchase order terms and conditions
      
      
4. Evaluate vendors:
   Identify the vendors with the largest number of receipts and unit volume and assess the problems they create for your company. Develop an assessment of how to deal with these vendors. Don’t implement compliance in all vendors at once. It may be impossible for small vendors to be compliant and you will lose time dealing with them initially. Start slow; give vendors three months’ notice of upcoming policy changes. Our vendor scorecard section below provides further recommendations.
   
   
5. Consider changes to the Supply Chain:
   Trends in Supply Chain Management processes include pushing vendor compliance up the chain and negotiating with vendors to do more of the procedures. Additional vendor responsibilities include vendor source marking, use of UPC bar code, and quality inspection in the vendor’s facility.
   
   
6. Address drop shipping:
   E-commerce sites often drop product from the vendor to the customer. Should your vendor compliance policies deal with these initially or be addressed at a later time? The systems, problems, and vendor relationship requirements are totally different.
   
   
7. Create vendor portal for policy and manuals:
   In many retail businesses there are thousands of vendors. Create an online portal and make it the vendor’s responsibility to stay informed of changes. You can devise ways to group email changes and direct them to the portal.
   
   
8. Make compliance a condition for doing business:
   Ask vendor management to sign off on acceptance of your policies as a condition of doing business and accepting the purchase order.

Typical vendor charge backs

As we mentioned above, vendor compliance policies are specific to your company’s operational, merchandising, and accounting requirements. Some of the items we commonly see included in a list of vendor charge backs include:

• Shipment not conforming to routing guide
• Early shipment without approval
• Improve PO# on carton
• Product substitution

READ: What Are Typical Vendor Charge Backs?

Vendor scorecard

A crucial part of an effective vendor compliance program is objectivity and fairness. Without this, you will create many problems for yourself and cause more costs and delays. A vendor scorecard process allows you to objectively evaluate the value and impact that individual vendors have on your business.

Most companies do not have a scorecard in place. This important process needs to include not only the operational impacts discussed above, but also the margin and cost impacts to profitability.

READ: How to Create a Vendor Scorecard for Your Business

Summary

• decrease inbound transportation costs
• allow greater planning of receiving labor and reduced truck congestion
• reduce fulfillment center costs in rework and correction and merchandise delays in processing receipts
• lower accounting department costs for dealing with errors in paperwork.