How do you evaluate your merchandise vendors? If you ask Merchandising, Operations and Accounting about vendor compliance and their performance, chances are you’ll get widely different answers. The merchandisers will consider the sales and margin and the vendor’s product development capabilities. Operations has to deal with QA and defective product problems, vendor packaging rework and late deliveries being escalated. Accounting will tell you about the vendor’s paperwork practices which are not according to your vendor compliance standards and result in chargebacks. Many companies are developing a holistic view of vendor performance through a periodic formal vendor evaluation using a vendor scorecard.
Product assortments in many omnichannel businesses have become very large – hundreds of thousands of SKUs – making it very difficult to keep track of vendor financial contribution and problems.
Most merchants manually pull together essential data from a variety of systems when they are meeting and negotiating with vendors. A uniform method, available to other managers under security access, will greatly benefit your business.
This blog shows how leading merchants are developing their scorecard to objectively evaluate the financial and service impacts vendors have on their businesses. Here are 6 points to consider in developing a vendor scorecard system:
1. Two major “slices” in the data
You want to be able to collect and display or report the data in two major ways: One by category, by vendor and all the vendor’s items in the category. And the second by vendor showing all styles or items you source from that vendor.
2. Key Financial Data
From your merchandising systems key financial data such as gross demand in dollars and units; cancellations in dollars and units; returns in dollars and units; shipped sales in dollars and units; gross margin earned are the most important.
For returns by vendor and item, save from the reason for returns reporting, the return reason codes that can be attributed to a vendor issue – i.e. poor quality, defective products, etc.
Also, save the backordered dollars and units for the products on a weekly basis. Many times backorder reporting is not cumulative; it is only as of a run date. As receipts come in and items are no longer on back order, you generally lose the backorder visibility that late deliveries cost your company. In a blog that we recently wrote we discussed that backorders have a financial impact to many companies of $7 to $12 per unit on backorder. Include those costs in the scorecard.
3. Be sure the vendor scorecard reflects the vendor compliance policy issues you have had with the vendor. Here are some:
- Merchandising: Failure to meet product specifications and quality standards and samples. Legal requirements by federal and state regulations,
- PO and Delivery Data: From the purchase order or order management system, collect the number of PO’s issued to each vendor and the receiving history in dollars and units. How many were delivered on-time and how many late. Total the PO counts, dollars and units that were on-time versus late.
- Operational rework issues: These include failure to follow routing instructions; cost to rebox or rebag; repackaging retail versus direct; quality and defective issues; failure to use EDI or ASNs; failure to get a transportation delivery appointment; incorrect quantity, incorrect pallet, carton or product labeling, etc. All of these problems slow down the moving product accurately through the distribution center.
- Accounting problems: Errors in invoices and packing lists; return to vendor; drop ship paperwork, etc.
- Chargebacks Assessed: Which of these types of errors resulted in vendor charge backs? Include them too.
4. Subjective evaluation
You can’t always reduce vendor performance to data and calculations. What are the ways that vendors excel which should be included in the vendor scorecard? Developing exclusives and private label manufacturing? How well does the vendor proactively communicate issues? Do they bring ideas that benefit your business?
5. Comparing vendors
Create a system calculated index which helps you compare one vendor to another for key data criteria such as sales, gross margin, etc. For more subjective data, input periodically with an A through E rating.
6. Make the data selectable
The data comes from multiple applications such as your order management system, financial applications and vendor compliance spreadsheets. Typically this data is collected into a data warehouse daily or at least weekly. The selection criteria should allow users to select by date range vendor performance data by:
- Specific vendor; or logical vendor groups (e.g. by category, class, style or SKU); or all vendors
- Drop ship vendors versus warehouse stocked product
- Import versus domestic sources
You have valuable data in your company about vendor performance. Make your vendor scorecard holistic and its value grows for management analysis and cost reduction potential too.