9 Steps to Develop, Implement a Vendor Compliance Program

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 vendor’s invoices for non-compliant shipments. A chargeback is a fee that a retailer assesses a vendor for errors and unauthorized changes in shipping the PO that do not follow the retailer’s business rules. However, the reality is there are very real costs and delays in merchandise availability for filling orders resulting from non-compliance.

This blog will serve as a guide as you develop vendor compliance requirements for your merchant company.

What Does Non-Compliance Cost?

Recently we discussed the cost of non-compliance with Kim Zablocky, founder of the Retail Value Chain Federation. For 25 years, RVCF has been dedicated to improving the retail and supplier relationship and meeting compliance standards.

“These types of charges have range typically ” Zablocky said, based on RVCF’s retail-supplier surveys. “So, if a manufacturer does $300 million annually in gross sales, based on an average charge of 0.6%, that’s $1.8 million in charges that need to be reconciled, disputed or written off. All of which is costly, requiring resources and labor.”

“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,”

He said the average charge/deduction is $250 to $300 per occurrence, which could mean multiple deductions on a purchase order or invoice. Zablocky added smaller 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? Here are 9 best practices to consider as you develop your vendor compliance policy.

Who’s Responsible for Standards and Policies?

Vendor compliance policies should be developed by a committee of stakeholders: merchants, inventory control, fulfillment center and accounting personnel that deal with these problems.

Determine Your Cost of Non-Compliance

Do a detail assessment of the problems non-compliance cause in the fulfillment center, merchandising operations and accounting department. Here are some examples to look for:

  • Lost sales and back orders: When vendors don’t deliver on time, it sometimes means lost sales and/or back order costs. What are they? From an ecommerce perspective, we’ve found in our experience working with merchant companies that back orders cost businesses .
  • Increased inbound freight costs: When vendors don’t conform to routing guides, it results in higher freight costs. Identify the number of occurrences by vendor and the non-compliance costs.
  • Delays in processing: When there are no standards, much of your fulfillment center and labor focus is on correcting and reworking problems. This causes delays in product that’s available to fill orders.
  • Unauthorized product substitutions: If vendors ship substitutions rather than the original product on the PO, you lose sales and have store display problems. Vendor debit memo processing takes time
  • Marking and packaging: Store packaging and pricing may be different than for ecommerce. Fixing vendor errors or omissions like price marking delays processing and merchandise availability.
  • EDI and processing systems: Major retailers, as well as marketplaces like Amazon and eBay are heavily dependent on EDI and electronic communication of POs, advanced shipping notices (ASNs), invoices and vendor source markings in barcode. Non compliance creates many problems with automated document processing.
  • Paperwork and accounting standards: Non compliance means more manual labor and exception processing to reconcile accounts and pay vendors.

This is a partial list. What are your problems caused by non-compliance?

Focus on the Largest Problems and Costs

Where will the most benefit come from? Don’t try to write and enforce the ideal policy in one step. Typically, these include meeting EDI and electronic document standards; use routing guides, which even small companies should have; labeling inbound cartons and pallets with product SKUs and purchase order numbers; and purchase order terms and conditions.

Evaluate Vendors

What vendors have the largest number of receipts and unit volume, and what problems are they creating for your company? Develop a system for assessing these issues and dealing with problem companies. Don’t implement compliance in all vendors at once. Small vendors may never be able to become compliant and time will be lost dealing with them. Creating a vendor scorecard gives you an objective analysis.

Changes to the Supply Chain

Trends in supply chain management processes include pushing vendor compliance up the chain and getting vendors to handle more of the procedures, including source marking, use of barcode and quality inspection in the vendor’s facility.

Address Drop Shipping

Should your initial vendor compliance policies deal with drop shipping initially or be addressed at a later time? The systems, problems and vendor relationship requirements are totally different.

Create a Vendor Portal for Policies, Manuals

All vendor compliance policies, company standards and purchase orders should be accessible through the portal; make it the vendor’s responsibility to stay informed of changes. Your company’s

Compliance as a Condition of Doing Business

Ask vendor management to sign off on your policies as a condition of doing business and accepting the purchase order.

Typical Vendor Chargebacks

Vendor compliance policies are specific to your company’s operational, merchandising and accounting requirements. To understand more about vendor compliance you can see our blog post here.

Effective vendor compliance procedures reduce fulfillment and supply chain problems and costs significantly, allowing inbound merchandise to flow quickly and smoothly from dock to stock. Smaller retailers need to explore how these procedures can positively impact their business, even if they don’t institute chargebacks.

Brian Barry is President of F. Curtis Barry & Company