Vendor Compliance: Setting Them Straight
Drive out inefficiencies and boost customer service by aligning with vendors to meet your supply chain goals.
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Vendor compliance programs are all about setting requirements that should result in the perfect order, and resolving problems when it misses the mark. But anything can happen between an order and payment. In the past, consignees often beat up their suppliers with compliance chargebacks, demanding improvements while doing too little to enable them.
Today, however, many organizations have made significant progress toward improving vendor compliance programs, setting up processes and tools to enable trading partners to collaborate rather than fight over inbound shipment expectations.
Some vendor compliance programs require only the basics: One or more departments within an organization issues regularly updated documents outlining general requirements. That approach works for companies such as Leggett & Platt, a diversified U.S. manufacturer of engineered products serving the furnishings, aerospace, and automotive markets. The company's inbound less-than-truckload (LTL) transportation requirements change little, and it has consistently enjoyed 99-percent-plus compliance levels, says Dwayne Kitchens, contracts and rates manager for the Carthage, Mo.-based company.
But many other companies are leaving tactical measures behind in favor of a more strategic approach. Thanks to increased focus on efficiency and, specifically, advancements in technology, leading-edge vendor compliance programs are forging new ground in quickly identifying and driving out error. They are also poised to take the next exciting step: detecting and heading off compliance issues before they occur.
"We're seeing an evolution to performance-based programs to facilitate the compliance process," says Richard Wilhjelm, vice president of business development at Compliance Networks, a Sugar Land, Texas, developer of private cloud-based software for retail compliance. "Most retailers are focusing on flow. Decreasing supply chain days equals decreasing capital requirements and increasing return on invested capital. That's the big metric."
The Market Imperative
The urgency around attaining the perfect order through compliance programs is amplified, thanks to a number of factors:
- Supply chains are getting longer, but faster, expanding opportunities for error while magnifying their impact.
- Efficiency has become an economic must—particularly in segments such as retail where private equity firms seek to buy in, improve, and sell off, and midsize organizations strive to compete with Tier 1 companies. The recession also prompted many suppliers to drive down chargeback costs.
- Technology is improving the ability to see—and measure—more supply chain processes. If you can see it and measure it, you can require it. The democratization of technology is also enabling smaller consignees and vendors to access more capabilities.
- Downsized compliance departments in the aftermath of the recession mean compliance must be simplified and more automated.
- Suppliers are finding that their customers will more quickly eliminate them—and even go direct—if their compliance isn't improving.
- The increasing use of direct shipping from vendors for e-commerce orders means parcel shipping must reinforce the brand experience.
While these forces are at work across industries, the particulars and economics of each one mean compliance requirements vary widely. Retail is best-known for its stringent programs—96 percent of retail members surveyed by the Retail Value Chain Federation (RVCF) in 2012 operate compliance programs that include assessments—while in the chemicals industry, requirements such as routing guides are rare.
"Companies with static distribution networks, such as commodity chemicals, or those transporting hazardous materials, don't want to be in charge of their inbound shipments," says Chris Cameron, senior solutions architect with Elemica, a supply chain operating network for the chemical industry headquartered in Exton, Pa.
In many industries, inbound sometimes tends to be overlooked in favor of outbound transportation, an area that's easier to control, and might be subject to its own set of vendor compliance guidelines.
"Outbound is the low-hanging fruit; inbound is what companies go after last," says Leif Holm-Andersen, executive director of professional services for Data2Logistics, a freight invoice processor and third-party logistics provider based in Fort Myers, Fla. "Inbound routing is still an immature space."
Among the challenges is a potentially large number of inbound shippers with widely varying levels of supply chain sophistication. To point, only 35 percent of companies use routing guides for their inbound freight, according to TransportGistics, a Bohemia, N.Y.-based developer of transportation management and logistics solutions.
For sophisticated and neophyte companies alike, technology is answering the call for more efficient vendor compliance.
Basic vendor portals offer a convenient way to push out compliance information and static or dynamic routing guides, a step up from e-mail and PDFs. Some portals also help vendors create EDI documents, leveling the playing field for smaller suppliers. And service providers such as Data2Logistics complement portals with call-in routing centers, serving as a control tower to solve more complex shipping challenges.
At the leading edge of compliance programs, consignees operate cloud-based portals offering a broad range of functionality, including bi-directional communication, as well as transactional business processes.
These portals might include dynamic routing tools to match loads to best-fit freight terms, including order consolidation; choice of carrier and use of multi-stop truckload; static or dynamic pooling; zone skipping; triangle routes; and backhauls. Some portals are also used to manage purchase orders and shipment visibility, exchange EDI data, and resolve chargeback issues, as well as to generate documents for bills of lading, commercial invoices, and labels. Vendor portals are increasingly integrating with consignee applications including transportation, warehouse, and order management systems to send and receive complete inbound shipment data, and execute scorecards and chargeback reports.
"We're moving toward broader portals, including a single sign-on to multiple functions," says Stephen Craig, senior managing partner, freight management for enVista, a supply chain consulting and IT services firm based in Indianapolis, Ind.
Such innovations are making it easier for vendors and consignees to communicate and achieve compliance improvements.
"These tools enable you to bring a purchase order to a transportation management system, present the logistics components to vendors, and, with a lot of alerts and reminders, get them to make a route request or ready-to-ship statement," says Craig. "This has increased the fill rates for many consignees."
It's also easier for vendors to get through the route request process than entering a portal cold and using an error-prone manual data-entry process. This approach also allows the consignee to run optimization on the routing, and match route requests to 856 ASN transactions so they can measure vendor performance from purchase order through advanced shipping notice.
Complete vendor compliance reporting requires integration across transportation and warehousing systems. Transportation systems reveal information about proper routing and EDI messaging, while consignees use warehousing systems to record data about whether a shipment was packed, palletized, and labeled according to specs. By bringing this data together, consignees can create an overall compliance score, and even reward high-scoring vendors by auditing their shipments less frequently, and speeding their goods toward a faster sale.
As capabilities expand, so do consignee expectations. "As technology improves, consignees ask for more," notes Jerry Glinnen, compliance manager for Lifetime Brands, a Garden City, N.Y.-based supplier of kitchen products and other housewares. "We see that happening continuously as more retailers come up to speed."
Retailers are also extending their compliance requirements to private label suppliers, and even agents, according to Compliance Networks.
One significant technology advancement is the ability to apply analytics to data. Dynamic routing applies optimization algorithms to orders, routes, and carrier selection, enabling consignees to analyze vendor performance history to uncover patterns and identify root causes of systemic shipping problems.
Data2Logistics furthers the compliance cause by tapping its expertise as a freight audit and payment provider to close the loop on compliance. "Because we invoice, we can see what the vendor did, such as whether it used the least-cost carrier and the actual cost of shipment," says Holm-Andersen.
The additional communication from consignees about inbound compliance requirements helps vendors know exactly what they need to do to keep customers happy and goods moving. But the proliferation of online tools and constant tweaking of requirements has become a management problem for many companies. Although basic requirements per customer can be configured into a warehouse management system, solutions are just now emerging to help vendors automate their interactions across multiple portals.
"One big problem is the inefficiency of going from portal to portal to look at each customer's requirements," explains Cameron. Elemica is developing a network to enable supply chain collaboration for its target industries—chemical, tire, and rubber companies—by integrating with partners' ERP systems, eliminating the need for vendor management portals.
Most chemical companies, however, are not yet ready for that level of interaction in logistics. In the interim, Elemica has developed functionality that enables clients to use its network to communicate via consignee portals, with Elemica handling the conversion of the client's message set for each portal.
Vendors should look across their customer base to identify areas of common practice and streamline related processes, which helps to strengthen the relationship between customer and vendor, recommends Kerry Loudenback, vice president of sales for TransportGistics.
For Ingram Micro Mobility, vendor compliance is all about consistency. As a provider of supply chain services for wireless carriers and OEMs, the company lives and dies by service-level agreements. So it is focused on making sure shipments flow quickly through its facilities.
"A best practice for us is driving consistency in labeling and palletization," says Jonathan Scheele, vice president, supply chain solutions for Ingram Micro Mobility. "The carrier is not as important as making a delivery appointment to ensure availability to dock."
To achieve that goal, Ingram Micro Mobility began issuing PDF compliance guides, and has attained compliance rates of between 95 and 100 percent. Improved compliance particularly helps emerging vendors in high-end consumer electronics meet distributors' exacting needs.
Another big challenge for vendors is making sure requirements are communicated throughout the enterprise. Lifetime Brands tackled this issue by getting proactive. The company created a compliance section on its intranet where it posts links to all its retailers' compliance guides. Within each DC, one person is responsible for getting information to the right places, under the direction of a central administrator.
To review its major customers, Lifetime Brands convenes weekly meetings attended by the EDI, credit, finance, warehouse, and compliance departments to go over every order and address emerging problems.
"In addition, our two DCs have daily internal management operational meetings to discuss orders and issues, and secure answers from needed sources," says Glinnen.
These efforts continue to decrease the chargebacks Lifetime Brands receives, including a 35- to 40-percent reduction during 2013 with certain retailers.
Glinnen also credits the company's participation in the Retail Value Chain Federation for its compliance gains. RVCF's Compliance Clearinghouse service monitors 175 retailers' compliance guidelines, and notifies members of changes. Monthly calls and forums enable vendors to problem-solve and share best practices. The entire membership also convenes twice yearly so retailers and vendors can meet one-on-one to clarify areas of confusion and solidify relationships.
"Retailers that attend want to see things done right, and are willing to work with any vendor that needs help and education on their processes," says Glinnen.
RVCF does the same for retailers. "Retailers had never talked to each other about the supplier management side of the business," says RVCF's Zablocky. Other retailer benefits include portal tools, supplier data scrubbing, vendor training, and templates for compliance guides and scorecards.
Getting in Alignment
The group is also continually trying to get retailers to align their compliance requirements, terminology, and chargeback fee schedules as much as possible. Surveys find that only 30 to 40 percent of retailers assess fees for the same non-compliance issues.
Most individual differences come in areas such as labeling and palletizing, which have a critical impact on distribution flow. With warehouse costs fairly predictable within a market such as the United States, argues the RVCF, it should cost about the same for any one retailer to correct a specific packaging or labeling error, which would help vendors better predict chargeback costs.
All these efforts have helped move the needle on overall compliance rates, but by how much is still tough to pinpoint.
"With the infinite combination of supplier/customer relationships, it is difficult to measure costs for businesses that utilize routing guides versus those that don't," says TransportGistics' Loudenback.
He recommends that vendors look across their customer base to identify areas of common practice, and streamline related processes, which helps strengthen the relationship between customer and vendor.
"What we have seen is that once customers implement a Web-based, interactive, secure routing guide and compliance program, vendor non-compliance quickly drops from more than 50 percent to less than five percent," says Loudenback.
Routing guides evolved into "how to do business with us" documents when consignees realized that operational issues have just as much, if not more, cost impact than transportation, he adds.
The tenor of vendor compliance seems to be changing as parties fully grasp the mutual benefit of turning orders more quickly into cash.
"A few leading retailers are becoming more relaxed in issuing chargebacks in the hopes of becoming more favorable customers to do business with," notes Clay Gentry, vice president, logistics operations at Transportation Insight. "Some compliance programs can develop a life of their own and spin out of control. That doesn't create a collaborative relationship with vendors."
A number of retailers are also managing to notify vendors of compliance issues within 24 hours, so they can respond and take corrective action quickly.
Enhanced visibility and data also have the potential to help consignees be more flexible with compliance requirements in cases where vendors are currently penalized for factors outside their control, such as truck breakdowns or missed delivery appointments.
Technology plays a large role because current tools permit retailers to quickly spot and report errors, and invite vendors to respond promptly. This more collaborative approach is helping to alleviate some vendor assertions that consignees use chargebacks as a revenue stream.
"Many consignees are better off economically if vendors follow their compliance processes than impose a $200 chargeback," says enVista's Craig.
Vendor compliance is expected to evolve in these areas:
- RFID. Often the factory floor or vendor distribution center is the best place to add RFID tags.
- More EDI. Some retailers are adding EDI 860, 812, and 820.
- Parcel compliance. Vendors are being asked to drop-ship parcels directly to end customers, and customers want to make sure the shipping experience is consistent with their brand's value proposition.
As analytics play a growing role, compliance tools will begin to predict—rather than react to—supply chain breakdowns.
"Based upon the analytics that we capture and collect, if we see that a supply chain failure will occur, we can alert the affected parties before it happens," says Holm-Andersen.
In the complicated world of day-to-day supply chain execution, the perfect order can remain an elusive goal. But a deft combination of solid processes, strong relationships, and robust tools are bringing vendor compliance programs closer to seamless, error-free flow of product from order to end user.