June 2006 | Case Studies | I.T. Toolkit

Slamming the Brakes On Supplier Misbehavior

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Tired of dealing manually with vendor shipping violations, aftermarket auto chain Pep Boys shifts to an automated compliance system to steer suppliers in the right direction.

Large retailers are always on the hunt for more efficient ways to move high volumes in and out of their distribution centers. For Dave Schneider, director of logistics at Pep Boys, which receives more than 91,000 shipments a year from suppliers and vendors, that means treating the supply chain like a glass pipeline.

Schneider and his team at the Philadelphia-based aftermarket auto retail and service chain are constantly peering through the glass, "looking at the snags and rough spots that interrupt the flow of merchandise through our facilities," he says.

Back in 2001, supplier behavior was causing major snags in Pep Boys' pipeline. Many companies that shipped merchandise to Pep Boys flouted its routing guide. Vendors booked receiving appointments 72 hours in advance, "but nearly one-third of those appointments were either rescheduled within the last 24 hours, or just didn't show up," Schneider says. Other trucks arrived unannounced.

Vendors committed other violations as well, including short shipping, late shipping, losing packing slips, and omitting bill of lading numbers. Those obstacles stood in the way of two important goals for Pep Boys: efficiently moving merchandise in and out of its DCs, and keeping its 593 stores fully stocked.

All Pain, No Gain

Pep Boys tried to make vendors change their ways, to no avail. DC employees spent hours each month assembling spreadsheets that detailed which vendors had committed violations, and the accounts payable department applied chargebacks. But when vendors saw those changes to their invoices, they complained to Pep Boys' buyers, and most of the time the charges were reversed.

"The last year we managed vendor violations manually, we charged back about $390,000," Schneider says, but $200,000 of those charges were rescinded. And, without chargebacks, vendors had no incentive to clean up their act. For all the pain the chargeback program involved, it offered little gain.

So Pep Boys halted the program. Instead, the distribution group began working closely with some of the worst-offending vendors. They invited these vendors to visit Pep Boys DCs when products arrived, so they could see firsthand the problems their violations caused. Pep Boys teams also went to suppliers' facilities to observe their processes.

Seeing Is Believing

Those visits yielded real improvements. "But we could never do this with every one of our 650 vendors," Schneider says. Pep Boys needed an automated way to pinpoint violations, apply chargebacks, and open channels for communicating with vendors.

In 2004, Pep Boys started using the Retail Compliance Management Solution (rCMS) from Compliance Networks of Sugar Land, Texas. A vendor-hosted system, rCMS stores data on every transaction between a retailer and its suppliers. It also stores routing guides and other rules that govern supplier transactions.

As a retailer places and receives orders, rCMS monitors the transactions for discrepancies—between purchase orders and receipts, requested ship dates and actual ship dates, and routing guide requirements and vendor behavior. The goal is to locate errors, apply chargebacks automatically, monitor vendor activities over time, locate factors that are causing problems, and encourage smooth interactions.

"Once a retailer decides to implement rCMS, Compliance Networks does most of the work," says CEO Greg Holder.

Pep Boys' main task during implementation was to write software to extract transaction data from its management systems. For its IT staff, that meant creating file transfer protocol downloads to move data each night from its legacy purchase order system and its EXE Technologies warehouse management system into the rCMS data warehouse.

The transaction data includes newly created purchase orders (POs) and recent changes to existing POs, details of shipments received, advance ship notices, and other electronic data interchange feeds from vendors or carriers. The company is still working to transfer data about processed or reversed chargebacks from its finance software into rCMS.

Rules and Training

The distribution department gave Compliance Networks the rules to include in its system, and helped train employees.

"Compliance Networks provided the hardware, helped with the installation, and did the lion's share of training," Schneider says. "Also, it tested to make sure data was mapped properly into its systems. Two Compliance Networks employees were on site at our building for about 60 days."

Executives from Pep Boys also worked with Compliance Networks to refine the system's rules and penalties. While the two companies didn't always agree, "we were able to develop a set of solid, reasonable rules," Schneider reports.

Pep Boys started using rCMS in May 2004, enforcing its rules in phases. Phase one addressed issues such as whether shippers used the right kind of pallet, whether trucks arrived on time for receiving appointments, and whether bills of lading were complete and correct.

Implementing phase two rules, which focused on fill rates (the percentage of orders shipped within an order due date), was a bigger challenge, according to Schneider.

"There was a lot of confusion about actual fill rates," he says, and company executives wanted to go easy on vendors at first. "We didn't start charging for fill rate violations until this fall because of all the challenges we faced measuring it."

"Our fill rates from some vendors were atrocious—as low as 50 percent or 60 percent," Schneider recalls. Since Pep Boys started using rCMS to enforce its rules, fill rates have improved. According to a recent report, the company is now at 93 percent overall.

Spotting Violations

Today, rCMS continually monitors vendor activity, and as it spots a violation, it automatically notifies the vendor and issues a chargeback. Though Pep Boys doesn't actually see the notices, management can run reports that recap any vendor's activity and performance.

"I can see what we've purchased from them, what they've shipped to us, and every violation they've committed," Schneider explains.

But rCMS isn't all about pointing fingers at vendors. The system has also helped Pep Boys evaluate its own performance, and improve supplier interaction. Thanks to its examination of how long it takes to unload trailers, for example, the company now processes 60 percent of trailers dropped off at its docks within 24 hours, and 95 percent within 48 hours.

That kind of self-examination is common among Compliance Networks users, Holder says. If rCMS shows that a vendor is repeatedly violating an expectation, the retailer may discover that the expectation is unrealistic.

"If a vendor or supplier is continually five days late processing an order with x number of days' visibility, maybe we need to lengthen our lead time for that company," he says. "The new system allows partners to work together to resolve whatever issues are causing business problems."

Retailers such as Pep Boys can pay up front to license the rCMS software, but many choose to take advantage of Compliance Networks' "pay for performance" model. Under this agreement, for a stated number of years, each time rCMS notes a violation and issues a chargeback, Compliance Networks receives a percentage of that payment. The more violations the system spots—and the more charges it helps the retailer collect—the more Compliance Networks earns.

Compliance Networks collects this percentage even if the retailer decides to forgive the charge, or if an apparent violation was actually caused by retailer error. If rCMS makes an error and falsely detects a violation, Compliance Networks doesn't receive payment.

Ideally, for Pep Boys, rCMS will eliminate most violations, drying up chargebacks and, in turn, its payments to Compliance Networks. That's part of the deal, Schneider says.

"Compliance Networks fully understands—and talks about it openly—that after a few years working with a customer, its revenue stream goes away," he says.

Under this application service provider model, users pay Compliance Networks to continue running the system, as well as a fee for it to maintain and improve the software. "But you don't pay the gain share anymore," Schneider explains.

A New Foundation

Pep Boys' vendor violations and chargebacks have not yet entirely disappeared, but rCMS has become an important tool for improving vendor relations. Now, rCMS is one of Pep Boys' foundation pieces for achieving good in-stock position, Schneider says.

"This new system boosts our bottom line," Schneider notes. "It has greatly helped us achieve better flow in that glass pipeline."

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