Guest Column | May 29, 2013

Vendor Compliance 103: Best In Class Vendor Compliance Program Considerations

Efficiency And Cash Flow Via Vendor Performance Improvement

By Gregory S. Holder, Compliance Networks

Catch up on Part One and Part Two.

In previous articles we introduced the idea of vendor compliance and how to start a program within your organization.  You can find it here. The latest article discussed how best-in-class programs integrate people, process and technology and introduced ten stages of vendor compliance programs. This article can be found here.

As the concept of vendor compliance goes mainstream, more and more companies are making claims to being vendor compliance ready.  Too many of these companies consider only a single vertical and even retailers who built their programs internally make the same mistakes.  Compliance programs are much more than vendor requirements (often times considered vendor rules), compliance audits and penalties (chargebacks or expense offsets) in the four walls of a DC as some companies claim.  Vendor compliance programs are also much more than using EDI data to produce chargebacks and vendor scorecards as many EDI companies claim. Vendor compliance programs are also much more than post audits used to capture vendor failures months after the fact.

Best-in-Class Vendor Compliance Programs

Best-in-class vendor compliance programs utilize data from both disparate supply chain execution systems and manually collected repositories. Once collected, the data is used to either identify supply chain failures or prevent future ones from occurring by sending out alerts to all responsible parties. When a supply chain failure occurs, best-in-class vendor compliance programs automate the identification, valuation and communication of the problem in an effort to prevent repeated occurrences in the future.  The idea is simple, if a failure cannot be prevented, notify the vendor as quickly as possible to prevent future problems and recover the costs associated with the failure that occurred.

Best-in-class programs also include multiple verticals of the supply chain including, but not limited to, physical audits (can be paper, RF or other types of mobile data collection devices) in the retail distribution centers, consolidators and other types of 3pl’s. EDI-centric audits for ASNs and invoices are common. Transportation audits including routing data and audits of delivered freight (BOLs, freight bills, consolidator manifests, etc) are extremely common but difficult to do accurately because much of the data is in a printed format. . Purchase order compliance and data when related to receiving information provides fill rate compliance to  varying degrees.  Tracking vendor trouble shipments in the DC helps identify types of problems as well as who is  responsible (news flash – troubles are not just vendor issues) and is another common vertical that best-in-class compliance programs utilize. These are just a few examples of verticals that should be considered for any best-in-class vendor compliance programs.

Do more with less – Audit Intelligence, Automating Manual Tasks, Supplier Self Service

Now more than ever we continue to hear employees at both retailer and supplier must do more with less.  This generally means less quality audits in the suppliers DC and perhaps fewer audits in the retailer DC.  To account for that, best-in-class vendor compliance programs classify vendors into various “at-risk” levels which automatically drive audit levels based on past performance.  This allows retailers the opportunity to spend more time on the at-risk vendors and less time on the statistically highly compliant vendors.  The result is a higher degree of confidence in inventory accuracy with less effort in the DC.

Continuing the theme of doing more with less, best-in-class vendor compliance programs not only automatically identify failures, they use available data to intelligently calculate the penalty associated to the failure.  Examples include, but are not limited to, the number of units or cartons affected by the failure, a percentage of the cost value of the affected shipment, a reversal of a fixed rate, a flat fee and even a progressive fee based on the number of occurrences during a pre-defined period.  Automatically calculating the penalty reduces manual mistakes and ensures accuracy of every chargeback.  Best-in-class programs also have unique ways to account for business exceptions like exempt vendors and/or purchase orders for specific rules. 

When penalties do happen, automatic notification is as important as automatically identifying the failure and calculating the dollar amount. This is the most important part because if a supplier does not know he is failing because retailers are not communicating the failures to him, he will continue to fail.  This can most easily be done via email and should include enough supporting documentation for the supplier to understand.  The best scenario is to attach a copy of the audit report detailing why a charge has been created including any photos, where applicable.

Since the 1980’s retailers have been using Vendor Requirements to intelligently move processes up the supply chain.  It is a fact that suppliers will dispute some number of chargebacks.  Most vendor compliance programs (created internally or by a third party) do not account for managing this process.  Best-in-class compliance programs make available a supplier dispute process on the internet putting in the hands of the supplier what would traditionally be a retailer requirement.  Requiring definitive information puts supplier generated proof with which a retailer can resolve the dispute in one session.  A secure integrated web portal also makes available supply chain data for a vendor to self-serve on their time schedule.  At a minimum, the same information sent in a notification email should be available on the portal. .  A better solution is  to include supplier scorecards and other key supply chain metrics.

The information presented in this article presents only a small number of considerations when building or buying a best-in-class Vendor Compliance System.  In the fourth and final article on Vendor Compliance we will discuss advancements in Vendor Compliance Programs as well as the Vendor Compliance Maturity Model.