April 2003 | Commentary | Viewpoint

Vendor Compliance: What Doesn't Kill You Makes You Stronger

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You just landed your first big customer. No more selling to mom-and-pops. You alert your suppliers and increase your raw materials inventory. You step up production and increase your finished goods inventory, anxiously awaiting the purchase order.

Then suddenly it hits you: in order to get the purchase order you have to comply with a seemingly endless stream of difficult-to-understand requirements that might include some or all of the following:

  • Product, shipping carton, and/or pallet bar-code labeling.
  • An electronic item catalog.
  • Exchanging business documents electronically via EDI or other paperless method.
  • Carton and/or pallet packing regulations.
  • Shipping restrictions and carrier scheduling.

Take heart. You're going through what most companies experience when they first learn about vendor compliance.

Vendor Compliance Can Make You Stronger

Vendor compliance rules are typical when doing business with manufacturing and retail companies in the top tier of their respective industries. Companies of such scale often have hundreds or even thousands of vendors and therefore need shipping guidelines to streamline internal processes and data flows.

You can use these same requirements as guidelines for improving your company's business processes. For example, if you're going to bar-code label items for one customer, why not bar-code label all your items? This might allow you to better organize your warehouse and bar-code label rack spaces with location identities. You can then introduce the use of scanners and software for taking faster and more accurate inventory counts.

Vendor requirements are often very similar, so if you can comply with one company's guidelines, it's likely you will be able to meet those of another. As such, being able to successfully comply with vendor requirements becomes a marketing tool when introducing your company's items to other similar customers.

Stat Committed to Compliance

It is not enough to simply be in compliance with your customer's requirements to get that first order in the door, then slack off. Failure to adhere to any vendor compliance requirement may, and usually will, result in financial penalties known as chargebacks or expense offsets. These miscues do not set a good precedent.

Chargebacks are sometimes taken off your invoices months after the infraction occurs, so make sure you dedicate a person who is familiar with your business processes to research each infraction. Do not use an infraction as a witch hunt for the guilty party. Instead, use it to identify and fix the problem, correcting the technology, training, process, or procedure that caused the mishap.

Also keep in mind that the customer is not always right. It is possible that your customer made a mistake in assessing the financial penalty. You will have to work with your customer to provide proof of your compliance, then follow-up to ensure you are refunded the withheld money. Proof of compliance can be found within EDI data or shipping paperwork from the carrier.

It is also important to note that many large companies use scorecards to assess the compliance of their vendors. Vendors with multiple financial assessments will get unfavorable scores. Your customer may be reviewing vendor scorecards several times per year and dropping suppliers with consistently unfavorable scores because of the added costs required in handling non-compliance.

Negotiate When Possible

Before committing to potential customers, ask them if they have vendor compliance rules and get a copy to review so you know what you're in for.

Some companies will grant waivers on some compliance requirements to first-time vendors. Make sure you get the waiver in writing and that it specifically states the requirement(s) being waived and includes the timeframe or number of initial purchase orders. This way, if your product does not do well in your customer's stores, does not meet your customer's manufacturing requirements, or is subsequently dropped after the first one or two orders, you have not made big financial investments for a short-term customer.

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