Commentary | IT Matters

A New Paradigm in Vendor Partner Management

Tags: Inventory Management, Logistics I.T.

Geoff Milsom, enVista Consultant, 317-208-9100

Leading companies are moving from traditional vendor compliance to vendor partner management a competitive differentiator in how companies manage their inbound purchase orders (POs) and transportation to increase sales and customer service.

Historically, vendor compliance has revolved around chargebacks the practice of making deductions from the purchase price when vendors break an agreed-upon rule or fail to comply with targeted standardized processes. Chargebacks are intended to incentivize vendors to remain compliant; however, when implemented, this punitive practice aimed at improving behavior does not, in fact, deliver improved inventory management and fulfillment. Strategically approaching vendor management with better processes and enabling solutions helps unite the ultimate goal of both parties: selling more products and accurately fulfilling customer demand.

Before providing a prescription for your vendor management requirements, it is important to gauge how close your organization's current vendor management approach is to establishing the perfect order through trading partner collaboration and automation. This can act as a guide or starting point for change, and help establish goals for the future state.

To understand important process flows, let's consider a typical scenario. An order is created when a sales person quotes (and often exaggerates) how much product is available for sale, and a buyer estimates (often inflates) how much product it can move. Though a standard practice, this negotiation means that both parties often begin the process with bad information about product availability and expected demand. The tools and processes covered here address the data flow and management from the time the PO is generated until the time the product arrives at the distribution center.

Despite the theoretical limitation of the PO's lifecycle ending at the DC, the PO's accuracy and efficient responses to the transaction have a lasting impact all the way to the store shelf. Effective vendor partner management delivers value from PO creation all the way to the point of sale.

Three Steps to a Strategic Vendor Partner Management Approach

Vendor partner management is about leveraging data typically already available with new tools and processes. Stepping beyond the old paradigm of mere compliance and moving to the more accurate and efficient vendor partner management approach is about managing three main components:

  1. The PO and the electronic data interchange (EDI) sets around it. Managing the accuracy of the PO can be achieved by managing the relevant EDI messages not merely reacting to the data, but proactively leveraging it to drive efficiency. When the PO is created, transparency is prioritized, so the vendor and customer agree on terms, price, order quantity and assurance there will be no SKU substitution. The supplier acknowledges receipt with an 855, a PO acknowledgment, or a similar response. Supplier response is key, because that buyer or merchant is making inventory decisions based on demand, and has a promotional plan or markdown strategy based upon that PO quantity.
  2. The inbound freight aspect of the PO(s). Often, vendors control the freight by routing it as prepaid. However, there can be tremendous advantages to converting freight terms from prepaid to collect in order to reduce costs and create more visibility. Once freight is managed in a collect scenario, the vendor must request routing with an EDI transaction (753) or via a portal in a transportation management system implemented by the receiver. These transactions and portals become another data capture point and management checkpoint that further increases visibility and fulfillment rates. If vendors do not request routing in a timely manner, they receive "harassing" email reminders to complete the process to drive on-time shipping. Once the product is shipped, vendors and suppliers have visibility to inventory in transit.
  3. Visibility of goods in transit. Tracking the product and inventory allows for better decisions and next steps by the DC and buyer. The message sent here an 856, or advanced shipment notice (ASN) creates yet another checkpoint to triangulate information, comparing the PO, the route request, and the ASN. If the quantities shipped are different than the quantity ordered, the buyer can change its customer or store allocation accordingly, knowing and reacting sooner in the order cycle. This results in maintaining well-informed and satisfied customers. Also, the receiving DC can now plan labor according to real-time information, rather than planned or expected amounts. Accurate inventory information can then be pushed out to final points downstream, which is powerful information in demanding markets.

The Benefit of the Right Tools

Companies are finding great value from implementing tools and processes that enable better visibility and control of in-transit inventory. This strategic approach to vendor partner management has also been enabled by a reduction in cost for the tools that support this process. Cloud computing and Web 2.0 allow companies to extend their systems to their trading partners' operations, facilitating regular, proactive communication.

This process transforms typical trading partner relationships originally based on reactivity and punitive chargebacks into collaborative partnerships. As a result, suppliers and retailers are now leveraging data to improve visibility, reduce costs, sell more product faster, and most importantly, provide better service to the end consumer.