Vendor Compliance 102: Typical Stages of Vendor Compliance Programs

By Gregory S. Holder, Compliance Networks

Catch up on Part One here.

Vendor Compliance Review
For year’s retailers have used vendor requirements documents to communicate purchase order terms and conditions and shipping requirements to their vendor community. Included in these requirements are penalties when certain requirements are not met. This penalty is commonly referred to as a chargeback or expense offset. Retailers generally deduct the value of the penalties from vendor checks upon vendor invoicing and include a cryptic message on the remittance advice. The purpose of the penalty is to attract attention to a problem, recover unexpected costs and to facilitate behavioral change. Vendor requirements documents exist to help normalize receiving and order processing activities for both retailer and vendor and help reduce supply chain variability.

Best-in-class Vendor Compliance Programs
A previous article discussed the seven steps to implement a vendor compliance program as well as internal rejections to getting a program off the ground. In general, vendor compliance programs should be evolutionary and not revolutionary. Just like any successful retailer who continues to look for areas of opportunity to improve, the same should happen with a compliance program. Best-in-class programs are centered on three key areas: People, Process and Technology.

1. People: People exist to collect information (think DC and corporate audits), create and update vendor requirements to support company strategy, and manage the program in general, as well as relationships between vendor/retailer operations, and retail buyer and vendor seller.
2. Process: Engineered data collection, DC processing, problem identification, and resolution and any and all methods for acquiring supply chain data both manual and automatically.
3. Technology: This is the hardware and software integrated with the people and process to close the look for a complete vendor compliance program. More mature programs will have more automation, depths and breadth than a program in its infancy.

Typical Stages of Vendor Compliance Programs
Over the last thirteen years we have seen hundreds of programs in differing degrees of maturity. As such we have identified ten stages of vendor compliance programs. In presentations when we discuss this most people in the room begin to discuss which stage their program is in. As you read through the list, decide which stage your company is in. It might just be a fun exercise.

1. Denial: Company does not believe there is a vendor compliance problem or the problem is not as bad as presented. Resolving vendor problem shipments have become standard operating procedure at the DC. They are good at it and have been doing it for years, but it is costing you millions in hidden labor costs.
2. Conception: Started by intelligent, frustrated, yet aggressive DC executives tired of dealing with the same vendor problems day after day. Vendor requirements guideline created.
3. Creation: Manual program of identifying problems, writing paper-based chargebacks in two part forms, filing one and mailing the other to accounts payable. Characterized by errors and labor costs, but does create charges to offset some of the unexpected hidden labor costs.
4. Excitement: The finance and logistics departments love the chargeback dollars created by the program but the company is still not committed to the program. There is very little or no IT and executive-level support.
5. Hope: The DC begins to see limited behavioral change in the vendors (and company too). The DC executive is ready to take it to the next level by providing better penalty documentation and automating more problem identification. Believes this will reduce costs and increase vendor performance. 
6. Acceptance: Finance is happy because the program is off-setting some costs. The program is good enough declares senior management. IT is happy because they can move on to other high profile projects. In the immortal words of Jim Collins: “Good is the enemy of Great.”
7. Anger: With no IT support and no corporate DC advocate, the real IT vendor compliance project never materializes. The DC is stuck with the initial program that was little more than a proof of concept. Too many other IT projects have higher visibility and very little is done for vendor compliance initiatives.
8. Reflection: The program is ineffective because of the lack of support and becomes “just another line item on the budget.”
9. Maintenance: The lack of support prevents the real problems from being addressed and solved. Early and Late shipments, poor fill rates and substitutions continue to be the norm and solving these problems remain standard operating procedure (SOP) for the DCs. Still, they are good at solving these problems. So good in fact, senior executives don’t believe a problem exists when in reality, the hidden costs are costing companies millions in lost productivity at all levels of the organization from the buying office to EDI and into the DC and even at the vendors.
10. Failure: Company loses focus (generally the DC exec moves on), the purpose of the compliance program is lost; expenses to operate the program are cut and with no IT investment made or a persistent project sponsor the program fails.

Hopefully, you are not in step 10. If you are, all hope is not lost. I have personally been through many of the steps and have seen all of the steps over the past twenty years. One of the most difficult and challenging (yet rewarding) thins in business is introducing an idea or concept that you are passionate about and seeing the results when completely

implemented. That is what this is all about. You know there is an opportunity at your organization. The fruits of the labor are not the chargeback dollars. The fruits are taking days out of the supply chain resulting in millions of dollars in inventory reductions. The fruits are a smoother flowing supply chain. The fruits are reducing or eliminating hidden labor costs in the organization. The fruits are the work quality of life gained by associates not having to deal with the same problems day in and day out. With the exception of the chargebacks and the reduction in inventory, the savings are grey areas but they do exist and should be included in any project justification.

If your processes are not perfect, don’t give up. Every senior executive we interviewed a year after going through this process responded honestly when they said something to the effect of “I totally underestimated the value this process would bring to our company.” It is nice to know even at the highest levels decisions are made in favor of urgency instead of importance. Help your company make the important decision.