How Vendor Compliance Improves Supply Chain Performance

By Erin Harris, Editor-In-Chief, Cell & Gene
Follow Me On Twitter @ErinHarris_1

Vendor compliance programs detect compliance problems and ultimately prevent them altogether, which has a critical impact on the supply chain. We connected with Greg Holder, CEO and founder of Compliance Networks, to learn more about how vendor compliance improves supply chain performance. Here’s what he had to say.

IRT: Vendor compliance has gotten a lot of attention in the press outside of the retail industry lately with major announcements from both Wal-Mart and Target. How does vendor compliance support improving supply chain performance?

Holder: In the 20 years, I have been associated with vendor compliance as both a practitioner and a service provider; I can’t recall ever seeing a single story related to vendor compliance initiatives for any retailer, let alone 2 or 3 within the last 6 months of 2016. Target and Walmart announced major changes from a compliance standpoint related to on-time and complete orders.  In both cases, delivery windows are tightening, fill rate requirements are increasing, and penalties for failures are growing more costly.  Around the same time, The Home Depot announced major changes to their inventory strategy.  As retailers continue to struggle with changing consumer habits through the point of purchase, we will continue to see more and more announcements similar to these.  People like to talk about the Amazon affect but I believe it has less to do with Amazon and more about the proliferation of smart phones and the shopping/browsing options available to every single consumer.  We can now do research online and buy in the store, shop in the store while researching on the phone, and buy in the store and have delivered to the home. These are only a few examples of countless options available now that retailers must contend with. But the fact remains that the retailer must have the merchandise the consumer wants somewhere in their network and these requirements exist to ensure that happens.  So in a nutshell, vendor compliance programs exist to help retailers execute the merchandising plan which is increasing in complexity. Retailers have to have access to the right product at the right time for the right price, now more than ever.

IRT: How does an effective vendor compliance program relate to the purchase order lifecycle?

Holder:  Unfortunately, most vendor compliance programs we see don’t relate to the purchase order lifecycle at all. Why we think it is important — and have included it in our solution — is because it is critical for retailers to understand their vendor’s shipping variability and the associated opportunities to reduce it. When Compliance Networks got its start, we set out to help retailers automate their vendor compliance programs.  Cost-conscious retailers have compliance programs but they are typically manual programs riddled with errors and incomplete data, which does not help the vendors understand what is wrong let alone how to fix the problem.  In general, most retailers are more interested in recovering the unexpected expense than helping the vendor solve the problem or prevent it in the future. We had a vision to automate the identification of vendor supply chain failures, auto-calculate the chargeback penalties, and most importantly, automate the communication of the event so it could be avoided in the future. To do so, this required us to get data from the retailer’s core execution systems, store it in a data warehouse, and then write the algorithms to identify the failures. When we stepped back from what we created, we realized that in addition to automating the vendor compliance component for retailers, we are also providing them a high level of end-to-end supply chain visibility from PO creation to receipt either in DC or into a store. This is what we term the purchase order lifecyle, and as evidenced by the articles referenced above, retailers are more focused on this than ever. 

Because we get data from retailer execution systems and relate it together, we now can see when a PO is created and approved, sent to the vendor via EDI, as well as its start, stop, and cancel dates.  We also see when it was routed, how many times it was routed, when the routings were approved, and when they are supposed to be picked up.  We can see when they were picked up, when they arrived on the yard, when they were received in the DC and booked into inventory.  For cross-dock orders, we can see when they were scanned and loaded on a trailer. In some cases, we can see when the carton was scanned at the store dock. For ASN vendors, we know when the ASN was sent, exactly what was sent, and in some cases the carrier and date the shipment was picked up.  This is the most complete picture we have ever seen related to the PO lifecycle and we have it for 100% of orders.  There are no EDI requirements from the vendor community to get this information. 

IRT: What are some examples of retail inbound supply chain performance improvements brought about as a direct result of a vendor compliance program?

Holder: Vendor compliance programs were created to influence vendor behavior.  If a vendor fails, the chargeback is intended to offset the unexpected cost incurred by the retailer for that failure.  What has surprised me the most over the course of the last 20 years is how our program highlights not just vendor performance, but the performance of the retail enterprise itself.  We have discovered problems are not limited to vendor performance, but can also be created by how the PO is written or allocated, delivered by the carrier, or even processed within a DC organization. We help companies identify and correct these problems, both internal and external, in an objective and positive way to drive bottom line profitability.

Related to vendor performance, I like to tell companies they sell zero percent of the items the vendors did not ship.  How are sales impacted when merchandise is late?  We hear all the time about how important on-time and complete is to retailers but few lack the discipline to track it let alone charge for it. We have found that vendor fill rates increase significantly when there are penalties associated with poor fill rates.  Other things to consider is the amount of safety stock as a result of poor fill rates and late shipments.  Identifying broad shipping variability and decreasing it can have a significant impact on safety stock and overall bottom line profitability. Compliance Networks and Retalon recently completed a case study on the massive profit improvement available to a $3 billion multi-national retailer by improving on-time inbound shipping performance. The study is available InnovativeRetailTechnologies.com.  

Finally, there are additional improvements a retailer can expect when they remove or mitigate shipping variability in their inbound supply chain.  Reducing the overall purchase order lifecyle will not only reduce inventory safety stock, but also have a corresponding reduction in associated DC expenses such as labor, transportation, and carrying costs. In addition to the reduction in expenses, DCs also see an increase in productivity and cartons per hour processed as there are less interruptions to deal with. But at the end of the day as the referenced articles suggest, most leading edge retailers we work with are focused on inventory as that is typically their single largest investment. A reduction in one day can be millions of dollars of impact to the retailer’s bottom line.