Obedience Training

When customer satisfaction is at stake, it doesn’t pay to stand out from the crowd. How to ensure that vendors comply with performance requirements

The advent of Internet-based ordering has helped fuel higher customer expectations for fulfillment performance. These expectations, in turn, are forcing even greater changes in fulfillment operations than previously anticipated. As ever, fulfillment is downstream from marketing and sales, but the consequences of the changes we have seen in our transactions are every bit as real and as important in this arena as they are elsewhere. The role of vendor compliance in the supply chain has attained new importance as more organizations strive to attract and retain customers.

At the outset, it is important to establish a clear definition of the term “vendor compliance.” On one level, it simply means identifying the ways in which your supplier performs in response to your request for goods or services. When we add the present-day practice of using third-party providers and the perspective of an integrated supply chain (the network starting at the “source” of a product and ending at the point of consumption), a supplier or vendor becomes “someone upstream from where you are.” That means you in turn may also be a vendor, unless you are the consumer of the item.

If you take a moment to consider the implications of that last point, it becomes clear that the “vendor” may be someone with whom you, as the customer, have no direct contact. Yet that same supplier has the potential to directly affect both your operations and the way in which your own customers perceive your service to them.

In this ever more prevalent situation, vendor compliance has come to mean all the ways in which suppliers throughout the supply chain need to be prepared to respond to customers downstream from them, whether contact is direct or indirect.

The `perfect’ order I first encountered this concept a number of years ago in a presentation by Ed Frazelle, formerly on the faculty at Georgia Tech and now leading logistics research and consulting activities at Logistics Resources International, based in Atlanta.

The perfect order seems simple on its face, but like so many powerful ideas, it bears more fruit as one delves further into its meaning. The perfect order is one that is executed perfectly in all ways. (I’m working from memory and have paraphrased, but you’ll get the idea.) It goes through ten stages:

1. The order is received accurately and completely, and the right terms of purchase (date, price, discount or contract, etc.) have been applied.

2. Inventory is available to fill the order completely on the first try.

3. Information about the order is communicated completely and accurately to the shipping facility on time.

4. The order is picked accurately and the service level is 100% on lines and quantity.

5. All value-added services (sorting, price stickers, packaging, and labels) have been applied according to the customer’s request.

6. A complete and accurate packing slip, ASN, and other required documentation have been provided.

7. The customer’s preferred method of shipment has been used.

8. The order has been shipped within the specified window to arrive on time.

9. An invoice has been executed using correct pricing and address information and is submitted in the requested format (e.g., as ordered versus as picked, or in item number sequence).

10. Payment for the order is timely and complete because the supplier has met all of the conditions affecting payment.

So what? Well, a number of major “so whats?” flow from this model.

“So what” No. 1: Today, it is common to flaunt service levels in our industry in the high 90s – to claim that 98% or 99% of order requirements are met regularly. It sounds pretty impressive until one examines this representation more closely. For some of the less conscientious suppliers, that number may relate only to the line level: 98 or 99 lines in every 100 are shipped on the first try. It doesn’t provide any indication of the portion of the order – how many pieces out of the total pieces ordered – that was not shipped. A more common and more honest measure indicates that 98% or 99% of the items or quantities in an order have been shipped on the first try.

But neither of those versions of fulfillment performance reveals how many shipments it took to complete the order. This insight was brought home by an automotive company that had the foresight to track this aspect of its vendors’ performance and discovered that some of its largest (and perceived to be among its best) vendors were shipping as many as 15 to 20 times to fulfill large replenishment orders. (As always, there’s no substitute for good measurement to get a clear picture of what is actually happening.) Imagine the additional cost at receiving alone for so many more shipments per order!

“So what” No. 2: There are probably very few readers of this magazine or practitioners in our industry who could with any certainty quantify the cost of multiple shipments in backorders, additional freight, or lost sales.

“So what” No. 3: Has anyone noticed yet that our discussion has addressed only one of the ten components of the perfect order? But that is probably the most common representation of performance in the fulfillment industry today. What Frazelle and others have pointed out is that if you have only one error of each type on different lines of a ten-line order and you tote up the errors or imperfections, you could readily end up with a performance rating of 50% or lower. In fact, if we were to apply the model of the perfect order, most operations in the U.S. are probably below the 90% threshold every day.

“So what” No. 4: As noted above, by a very large margin companies today are focused on fulfillment measurements far narrower than that of the perfect order. Among those organizations that do look at most aspects of the process, responsibility is often divided among separate functional areas. Even fewer vendors share their measurement processes with their customers and suppliers.

Over the past 25 years, logistics operations, material handling automation, and computer technology have either reduced overall distribution costs or held them steady in a context of higher volumes, a wider range of product offerings, and an increasing diversity of customer services. The Herbert W. Davis Company has published statistics on these subjects over a number of years, most recently in the proceedings of the Council of Logistics Management national conference in 1999. Between 1994 and 1998, the cost of customer service as a percentage of sales increased, although overall distribution costs declined.

Cost-control pressures from consumers and management are worsened by the propensity of catalog and retail operators to compete on quality, service, cost, and speed. To attain the requisite improvement, managers must cut costs in every possible aspect of the process.

Enter the perfect order. If logistics operations measure performance against defined standards, they will be successful in avoiding high costs and service failures.

The price of wrongdoing Before examining how compliance can move suppliers toward the perfect order, it will be instructive to touch on some of the ways in which “wrong” happens. For vendors within the supply chain, several aspects of the process commonly contribute to imperfection.

Failure to provide products or services as requested is probably the most common. Errors may occur with regard to product quality, service level, product identification, assorting, pricing, inner- or- master-pack quantities, use of specified carriers or modes of transportation, on-time shipping or delivery, ASN timing and accuracy, and paperwork (from customs to freight to invoicing to regulatory compliance), among other factors.

The next most frequent failure after omission is errors. Providing flawed goods, inaccurate product identification, incorrect pricing or packaging, or inaccurate documentation affects every point in the supply chain beyond the one where the mistake occurred. But perhaps more important than any other factor for many customers is consistency. Providing predictable performance holds more value than other factors because it informs expectations and allows everyone along the line to plan.

Depending on the industry involved, the cost of doing “wrong” can be very high. Consider a simple example of an incorrect business-to-consumer shipment. If an order for five items, each costing $5, is shipped by the best way at a cost of $6, the value of that invoice might be $31. At a margin of 45%, the supplier stands to make $13.95 in profit, in the perfect-order scenario. If, through error or omission, the order is not perfect and the recipient contacts the customer service department, that profit can rapidly vanish. The costs entailed in “perfecting” that order might include transportation for a return, plus a replacement; the price of lost or damaged goods; labor to pick, pack, and check the order again; and customer service labor and phone charges. If the error results from an excess shipment in which the goods are not recovered and not invoiced, that cost must be considered as well.

In the retail environment, where customers tend to be relatively unforgiving, costs for failure to comply can add up to millions of dollars. And, of course, this money comes straight out of profits.

At the risk of stating the obvious, you can’t enforce compliance if your vendors don’t know your requirements. It remains common to find organizations whose purchase orders or other sourcing documents contain limited, ambiguous, or self-contradictory information about compliance terms. Some companies have multiple versions of compliance requirements depending on where the purchase originates. Many customers continue to rely on documents that are out of date and in serious need of review. Developing and maintaining current requirements and getting them into vendors’ hands is a significant first step in moving forward.

The next level of need is enforcement. Receiving operations may lack the training, tools, or discipline to monitor vendor performance adequately. In these circumstances, management should provide the leadership and resources to enable the group responsible for monitoring compliance to accomplish its job.

Some operations properly identify compliance problems on a regular basis, only to be thwarted because the “teeth” in the enforcement process lie elsewhere in the company, in departments that have no vested interest in calling vendors’ shortcomings to their attention. An effective way to avoid this problem is to delegate responsibility for determining enforcement penalties to a cross-functional team representing purchasing, operations, and finance. This assures greater objectivity and reduces the exposure of any single function to budget or vendor pressures.

Keep it straight Once the compliance enforcement process is under way, a number of strategies and refinements can be used to improve it. The following are some useful techniques:

Statistical sampling. First, install one or more processes for monitoring vendor performance. Statistical sampling is a highly effective method. Establish an acceptable level of performance along each of the appropriate dimensions for each vendor. Second, set a category of products and services to be evaluated for each cycle, such as month, season, shipment, or purchase order.

Vendor performance history. Once the monitoring process is in place, build a history of the data captured and share it with vendors. This can lead to considerable improvement in the relationship as well as vendor performance over time.

Self-inspection. It may be appropriate to ask vendors to conduct an inspection similar to yours prior to shipment to help ensure that they find and correct as many problems as possible at their end, where it is often easier and less costly to do so.

Vendor certification. Once a significant history is established, vendors can be readily differentiated, based on performance. Using this data, customers can certify vendors who are consistently in compliance. This enables them to reduce monitoring and its associated costs without risking a decline in compliance. It also affords the application of more resources to those vendors who warrant the added attention. Acquisition cost is controlled by this improvement because purchase orders, packing lists, and invoices will match more frequently and can flow easily through the system. Some parties also negotiate a specified allowance for claims, which are automatically paid without challenge, based on certification.

Talk. Compared to the cost of non-compliance, talk is cheap. There is no substitute for strong, recurring communication between vendors and customers. This should be an ongoing process and is most effective when it includes site visits by both parties. The team charged with this duty should include representatives from all the departments involved in the process, not just credit, accounts payable, or purchasing. This same team can be tasked with keeping compliance requirements current as business conditions change and making sure that vendors have ready access to updated information.

The final point to be made here is that a compliance program of this kind must be sold at several levels and repeatedly over time. One of the difficulties in persuading management of its merit is that its benefits include intangibles such as goodwill, perceived improvements in service, and better vendor relations. Make no mistake – these have genuine worth, but they are hard to quantify. Selling their value involves convincing management and customers (internal and external) that things have improved, and actively soliciting their comments to that effect.

You can accomplish this as part of building the communications channel, but also through the regular use of survey instruments, analyses of complaint patterns, and other information. This type of documentation will serve the best interests of both vendors and customers and contribute to an overall reduction in supply chain costs.