The Retail Industry: Improving Supply Chain Efficiency Through Vendor Compliance - Part 2 An Andersen Point Of View

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The Retail Industry: Improving Supply Chain Efficiency Through Vendor Compliance



The arrival of the new economy has brought significant changes to the existing business landscape. In particular, the retail industry is quickly learning the value of developing strategic working relationships with vendor partners to improve supply chain efficiency.

Without these collaborative efforts, retailers will have difficulty achieving strategic goals that rely upon the efficient flow of merchandise. Vendor cooperation and compliance are the key drivers that support improvement in productivity flow (e.g. through implementing cross-dock operations) and will ultimately allow retailers to optimize their overall distribution network.

On average, inbound distribution center productivity (cartons per hour received) increases by approximately 25 percent with an effective vendor compliance program in place. However, vendors do not always embrace these concepts, viewing compliance programs as a means for retailers to generate revenue. To over-come this, retailers need to demonstrate a commitment to establishing true partner-ships by sharing strategic information, maintaining consistent dialogue and collaborating on planning and forecasting with key vendors. True best-in-class retailers communicate program objectives to their vendors and only assess monetary penalties as a means of offsetting expenses. For vendors, becoming compliant ultimately means merchandise will reach the consumer faster, thereby increasing sales. This concept of working together and developing joint action plans to solve problems ultimately contributes to program success and strengthens vendor-retailer relationships.

This is Part Two of a two-part note on Improving Supply Chain Efficiency. Part One discussed the Communicating Compliance Objectives..

Processes and Information  

The processes and information captured to support the violation should be as automated as possible. In the event that a system query cannot provide the necessary results, manual data collection should be used as an alternative. Although this is a more labor-intensive, time-consuming process, it is necessary to capture all the details to support a claim. Due to the potential complexity of capturing data to support a violation, it is imperative to focus on developing the procedures to monitor and track high-impact requirements first. Such action will provide immediate and noticeable improvement in the efficiency of the supply chain and will also provide a strong foundation to under-take the monitoring of additional, less critical requirements.

The vendor compliance database can range from a complex system built within the retailer's existing architecture to a smaller, stand-alone desktop database application. Another option is to use an external company to perform these services.

As a means of payment, these companies take a percentage of the expense-offset penalties. Regardless of the data management tool, testing must be thorough and complete prior to releasing any reports to internal management or vendors. Assigning an incorrect expense-offset penalty not only creates an administrative nightmare, it also challenges the overall integrity and reliability of the vendor compliance program.

Vendor reports should clearly identify the violation in conjunction with the corresponding requirement, as identified in the vendor compliance guide. Although compliance data is sourced from various departments within the retailer's organization, it is essential to have a consolidated, consistent reporting process. By doing this, vendors receive one comprehensive report and have a single point of contact to discuss/dispute any violations. The internal reports will identify consistent problem vendors, requirements most frequently violated and overall vendor performance trends. This information will assist the retailer in making strategic decisions about the future of vendor relationships. In addition, retailers also need to monitor and track compliance issues caused by a breakdown in internal processes. By tracking and reporting this information, the retailer can communicate problems to the appropriate internal department and work to implement process improvements.

Effectively Launch A Vendor Compliance Program   

To effectively launch a vendor compliance program, retailers are encouraged to pilot with a manageable group of vendors. High-volume vendors with known compliance issues should be the primary targets, as they will have an immediate impact on the efficiency of the supply chain. Focusing on specialty or seasonal vendors with low volumes or low violations would not yield a measurable return. By selecting a pilot group, the retailer will have a better understanding of the volume of incidents and the workload necessary to manage the entire program when rolled out to the entire vendor base.

In order to monitor the daily operations of the vendor compliance program, the retailer must assemble a vendor compliance team. At a high level, this team is responsible for administering and managing the program, implementing enhancements, generating reports, maintaining ongoing internal/ external communication, resolving expense-offset disputes and establishing vendor improvement/action plans to achieve compliance. After an initial grace period, which typically ranges from two to four months, vendors will be subject to expense-offset penalties, usually taken in the form of a deduction from an invoice.


As the economy becomes more competitive, the value of retailer-vendor relationships and the importance of working together to solve business problems will increase. EDI documents, routing, carton labeling and quality control are areas that have significant impact on the efficiency of the supply chain. By focusing on high impact requirements and working together to solve problems, both retailers and vendor partners will benefit. It is the partnership and the increased efficiency that give vendor management the power to create proactive business change.

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