Guest Column | December 27, 2012

Vendor Compliance 101: Steps To Implement An Effective Program

Efficiency And Cash Flow Via Vendor Performance Improvement

By Gregory S. Holder, Compliance Networks

What is Vendor Compliance?
For far too many, the idea of vendor compliance has a negative connotation when in fact the end game is really simple and extremely beneficial for both retailer and vendor or supplier; a smoother flowing retail supply chain. Vendor compliance normalizes receiving activities and improving vendor compliance (performance) reduces supply chain variability resulting in successful merchandising plan execution.

Going as far back as the 1980s, retailers have been creating “instruction manuals” to help vendors understand purchase order terms and conditions, shipping requirements as well as value added service requirements.  These instruction manuals come in a variety of shapes and sizes and have evolved over the years.  In the early days they consisted primarily of shipping requirements helping to communicate to a vendor what carrier to use based on origin and destination zip codes.  These early instructions were called routing guides and they benefited both the retailer and the vendor by eliminating telephone calls requesting routing. This made the entire shipping process much more efficient. 

As retailers continued to look for areas of opportunity to reduce waste and become more efficient, the routing guides evolved into vendor requirements documents and added much more detail to reduce the time required to accurately account for merchandise and get it to the selling floor as quickly as possible.  Organizations like VICS and GS1 (UCC originally) were created to facilitate standards between the trading partners.  Retailers wanted barcodes on cartons, UPCs and prices on merchandise.  They started asking that orders be packed and shipped for specific stores and be shipped ‘floor ready’. To encourage adoption with the requirements, they implemented a penalty program for vendors that failed to comply with their requirements.  These financial penalties are called chargebacks or expense offsets. The process of identifying and assessing the supply chain failures is called vendor compliance.

As the supply chain evolved and more and more processes were pushed up the supply chain, retailer DCs changed.  Suddenly, they were not able to efficiently process non-compliant orders, adding days and expense to process these orders.   The chargebacks are one way to offset the added expense and possible lost sales.

Why is Vendor Compliance important and who is doing it?
Vendor Compliance exists to support the retail merchant, the perfect order model as well as the ‘right product, right quantity and right time’ concept.  Improving vendor compliance or vendor performance reduces or eliminates waste in the retail supply chain and could be considered the lean or six sigma of the retail supply chain. Retailers, who for years have focused on taking days out of the supply chain, are now working on taking hours out of the chain so when a non-compliant shipment arrives at a retailer DC it impacts the entire process.  Considering that most retail DCs operate in a flow environment, the non-compliant shipment is like an automobile accident on the way to work.  Even if you are not involved in the accident you are impacted by that accident.  So, one non-compliant shipment can have serious consequences on other shipments in the DC. 

Any retailer with multiple locations, multiple vendors, concerned about inventory accuracy, decreasing the total order cycle, and supporting the merchandising plan should have a vendor compliance program.  The steps to a vendor compliance program are quite simple.

How Can I start a Vendor Compliance Program?

  1. Identify vendor requirements and create the requirements document: Thes