If you ask someone in merchandising, operations or accounting about vendor performance, chances are each will give you widely different answers. The merchandiser will consider the sales and margin and the vendor’s product development capabilities. The operations executive has to deal with QA and defective product problems, vendor packaging rework and late deliveries being escalated. Accounting will tell you the vendor’s paperwork practices aren’t in line with your vendor compliance standards and result in chargebacks.
To avoid this cacophony of voices, many companies are developing a holistic view of vendor performance through a periodic formal evaluation using vendor scorecards.
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 vendor scorecards to objectively evaluate the financial and service impacts merchandise suppliers have on their businesses. Here are 6 points to consider in developing a vendor scorecard system:
Two major “slices” in the data
You want to be able to collect and display or report the data in two major ways:
– By season, category, by vendor and by all the vendor’s items in the category
– By vendor, showing all styles or items you source from that vendor.
Printed reports will need to be summarized because of the amount of data.
Key financial data
To measure the financial contribution a vendor makes to your business, save key financial data from your merchandising systems. This should include gross demand in dollars and units; cancellations in dollars and units; returns in dollars and units; shipped sales in dollars and units; purchases at cost; and gross margin earned.
Most order management systems have “reasons for returns” reporting. Save by both vendor and item the return reason codes that can be attributed to a vendor issue – i.e. poor quality, defective products, etc.
Also, save by item the number of back orders that occurred because the product was not available, both in unit quantity and dollars. Many times inventory systems do not keep this cumulative history. As receipts come in and items are no longer on back order, you generally lose the back order visibility that late deliveries cost your company. Earlier we discussed how back orders have a financial impact on many companies, running between $7 and $12 per unit. Include those costs in the scorecard.
Have the scorecard reflect compliance policy issues you’ve had with the vendor
Include QA notations when the product fails to meet written specifications; when its first production does not match samples; when the product does not meet requirements of federal and state regulations, etc.
PO and delivery data
From the purchase order or order management system, collect the number of POs issued to each vendor and the receiving history in dollars and units. How many were delivered on time and how many were late? Total the PO counts, dollars and units that were on time vs. late.
Operational rework issues
These include failure to follow routing instructions; cost to re-box or re-bag; repackaging retail vs. direct; quality and defect issues; failure to use Electronic Data Interchange (EDI) or Advanced Shipping Notices (ASN); failure to get a transportation delivery appointment; and incorrect quantity, pallet, carton or product labeling. All of these problems slow down the accurate flow of product through the distribution center.
Errors in invoices and packing lists; return to vendor; drop ship paperwork, etc.
Which of these types of errors resulted in vendor chargebacks? Include them too.
You can’t always reduce vendor performance to data and calculations. Which categories of vendor excellence should be included in the scorecard? Developing exclusives and private label manufacturing? How well does the vendor proactively communicate issues, or bring ideas that benefit your business?
Create a system calculated index which helps you compare one vendor to another based on key data criteria such as sales and gross margin. For more subjective data, input the findings periodically using an A through E rating system.
Make the data selectable
The data comes from multiple applications such as order management systems, financial applications and vendor compliance spreadsheets. Typically it’s collected into a data warehouse daily or at least weekly. The selection criteria should allow users to choose vendor performance data by date range including:
- By specific vendor or logical vendor groups (e.g. by category, class, style or SKU); or by all vendors.
- By drop ship vendors vs. warehouse stocked product;
- By imported vs. domestic sources
You have valuable data in your company about vendor performance. Make your vendor scorecard holistic and its value will grow for both management analysis and cost-reduction potential.
Curt Barry is president of F. Curtis Barry & Company