Special Report: Vendor Relations

Of all the strategies for reducing costs in your catalog business, vendor compliance programs may be the most underdeveloped. A well thought out, formal vendor compliance policy can reduce warehousing and freight costs, speed up order processing, and lead directly to increased customer satisfaction. To achieve this, you must spell out your requirements and chargebacks for vendor noncompliance.

Without a formal vendor compliance policy, the warehouse has no recourse but to absorb both direct and hidden costs for noncompliance. Without compliance, it’s impossible for multichannel merchants to implement advanced supply chain systems (ASNs), just-in-time inventory, source marking and ticketing, or radio frequency identification programs. A good vendor compliance policy not only avoids pitfalls, but also reduces the time spent dealing with vendor disputes, claims and chargebacks.

Merchants are sometimes leery that more comprehensive accounting and chargeback policies may upset vendor relationships they’ve worked long and hard to develop. Along with weighing that possibility against the probability that improved vendor compliance will reduce costs and improve customer service over time, consider that a well-defined document in which requirements, expectations and penalties are spelled out ultimately removes ambiguities, ends misunderstandings and results in even better vendor relationships. And if your vendors deal with large retail companies, they’re already used to compliance policies.

Where’s It Needed Most?
The first and most important step in developing a vendor compliance policy is to understand what’s currently going on. Analyze and agree internally on the areas of greatest concern. Two areas are almost mandatory: on-time delivery (reduces back orders) and inbound routing guides (reduces transportation costs).

For example, take late delivery of receipts, a major cause of back orders. Back-ordered merchandise costs most companies $7 to $12 per unit. This is absorbed across your business; for instance, in call-center costs (“Where’s my back order?”), additional picking and packing, second outbound shipping expenses, and loss of shipping and processing revenue offset. To have vendors control shipping or not follow compliance routing is a sure way to significantly increase transportation costs.

When accounting for the cost of back orders, unacknowledged substitutions and other common vendor-related problems, and their impact on profitability, note they affect many departments: operations (second and subsequent orders being picked and shipped), accounting (extra paperwork), marketing (loss of shipping and handling income) and merchandising (added time dealing with problem shipments and strained relationships).

Since all departments have a stake in the problems, course of action and working with vendors, monitoring vendor compliance should be a team effort. The whole team should be held accountable for developing and implementing new procedures. Once everyone recognizes the costs you absorb from a lack of vendor compliance, or that you want to save, you can lay out a strategy that addresses these problem areas.

Chargebacks to Consider
As you develop a chargeback schedule that penalizes vendors for not adhering to procedures, consider how you determine a fair or representative chargeback cost. Our company has developed rates per hour used (typically $40-$50 per man hour), or you could apply a cost per infraction, which is $100 and higher in many larger companies.

Admittedly, large retailers often look at chargebacks as a profit center. It’s not the revenue generated that’s important. Stress to employees, and especially to vendors, that you’d rather have the receipts be compliant than whatever charges are levied. You may even waive chargebacks where vendors are generally compliant.

Whatever your policy is, educate distribution center staff members. They, in turn, have to report the noncompliance reasons and scope (problem, units affected, etc.), so make it easy to understand and administer.

Chargeback categories used in a midsize direct merchant’s fully developed compliance manual includes the following:

• improper P.O. number on carton or label;
• wrong product sent;
• product isn’t labeled with a SKU number;
• style or product substitution without approval;
• inbound receipt past cancellation date;
• incorrect labels or placement of labels;
• product not labeled with country of origin;
• lacking a certificate of origin on shipment;
• product specs not sent in advance of shipment;
• no photo sample;
• merchandise not packaged according to specs, repackaging required;
• early shipment without approval;
• merchandise requires 100 percent inspection;
• mixed P.O. box numbers on pallet or in cartons;
• mixed SKUs per carton;
• failure to meet cross-dock-to-store requirements;
• bill of landing not complete;
• shipment doesn’t conform to routing guide;
• back orders caused by late delivery;
• merchandise damage not attributed to carrier;
• incorrect shipment option;
• incomplete or incorrect placement of packing list, or no packing list at all;
• shipment sent on a nonstandard pallet;
• failure to protect fragile merchandise during shipment;
• delivery to wrong address; and
• delivery without appointment.

The Bottom Line
Today, managing vendor relations is essential for efficiency and cost control. Multichannel merchants that ignore this potentially volatile aspect of their operations do so at their own peril. Those with a seasoned, well planned vendor compliance program can achieve significant savings.

Curt Barry is president of F. Curtis Barry & Co., a multichannel operations and fulfillment consulting firm focused on multichannel systems, warehousing, call centers, inventory and benchmarking. You can contact him by visiting www.fcbco.com.