Katzscan Inc. - Barcode Applications & Electronic Data Interchange (EDI) Consulting

An Introduction To Vendor Compliance

By: Norman Katz, Katzscan Inc.

Congratulations! You’ve just landed your first big customer! No more selling to just the “mom-and-pop” stores – this is really going to get your product national exposure and take you to the big time. You’ve alerted your suppliers and increased your raw materials inventory. You’ve stepped up production and increased your finished goods inventory, anxiously awaiting the purchase order. And 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. You suddenly have an appreciation for the good old days of “mom-and-pop” customers.

Take heart – you’re going through what most companies go through when they first learn about “vendor compliance”. And you’ve found out about it when most companies do – too late! In brief, the term “vendor compliance” refers to the requirements for conducting business that a company institutes for its vendors (suppliers).

Vendor compliance requirements can include some or all of the following:

product, shipping carton, and/or pallet barcode labeling
an electronic item catalog
exchanging business documents (i.e. purchase orders, invoices, payments, and shipping notices) electronically via Electronic Data Interchange (EDI) or some other type of paperless method
specific product design features
carton and/or pallet packing regulations
shipping restrictions and carrier scheduling

In addition, you might be asked to sign a very legal document binding you to conduct business based on your customer’s vendor compliance rules.

Why vendor compliance rules?

Vendor compliance rules are typical when doing business with the major retail department stores, specialty stores, grocery stores, office supply stores, automobile manufacturers, electronics companies, as well as other companies in the top tier of their respective industries. Companies of such scale, which can extend regionally or nationally, often have many hundreds or even thousands of vendors supplying a wide variety of raw material parts or finished goods items. In order to streamline their internal processes, from the issuing of the purchase order through the receipt of goods and payment of the invoice, companies require all their vendors to conduct business the same way based on the same set of rules, utilizing current technology to the fullest extent to reduce human intervention and thus reduce errors. These vendor compliance rules become the foundation for the business processing that a company’s computer systems are based upon, linking all this data together for tasks such as automated inventory control and complex sales analysis reporting.

The internal benefits of compliance

Okay, now that someone has revived you and picked you up off the floor, you begin thinking to yourself, “Is it worth the effort to comply with all these rules, and how much is this going to cost me?” In truth, these are excellent questions to ask.

Typically, growing companies tend to have poorly defined business processes and procedures due to the fact that the management and staff are usually just trying to handle the business growth. Fast growing companies might be in a reactive management state as opposed to a proactive management state due to the speed of the growth and inability for the company’s resources (especially personnel) to keep pace. Financial resources are committed to what’s absolutely necessary to fuel the growth, such as extra manufacturing equipment or warehouse space and racks.

Just as your customer has built efficiencies into their processes via vendor compliance requirements, you can use your customer’s vendor compliance requirements as a guideline for improving your company’s business processes. This may involve realigning personnel or forming a special team to carry big customer orders through from order entry to manufacturing to shipping. If you’re going to barcode label items for one customer, why not barcode label all of your items? And while you’re at it, why not straighten out that messy warehouse, getting better racks, and barcode labeling the rack spaces with location identities. Then, with all items and inventory locations barcode labeled, you can introduce scanners to be used for taking inventory, increasing the speed and accuracy with which inventory is controlled. Better control of inventory (raw materials and finished goods) always yields positive results.

Instead of scheduling shipment pickups for just one customer, why not try it with all your shipment pickups? This can bring order to the chaos of your shipping department who might always have trucks waiting for an open dock space due to lack of scheduling. The implication here is that if your outbound shipments are being scheduled, then your production of goods to be shipped is probably being more efficiently scheduled, possibly by grouping orders for similar products together to reduce machine switchover downtime.

And of course, you’ll want to look at upgrading your computer hardware and business applications software that is used to manage your company. Make sure that the software will allow you to grow into the efficiencies (i.e. using barcode scanners for inventory control) that your customer(s) are utilizing.

While all of the above improvements come with costs, they need not be expensive solutions. For example, a barcode label printing solution, consisting of a good quality barcode printer and software, can be acquired for around $2,500. Very functional inventory control software solutions can be found starting around $5,000. EDI service bureaus can be a quick, low-cost way to start conducting business electronically with your customers until you decide to bring EDI processing in-house integrated to your sales order processing, accounting, and shipping software application(s).

So, is it worth all the trouble? If you are looking to grow your business and sell your company’s products to the top tier customers within your industry, the answer is “yes”, but only if you take the lessons learned and apply them to improve your own company’s operations too.

A marketing and competitive aid

Within a given industry, such as retail department stores, one company’s vendor compliance requirements will be very similar to those of another company. Thus, if you can comply with one company’s vendor compliance requirements, it shouldn’t be difficult to comply with those of another company. As such, being able to successfully comply with vendor requirements becomes a marketing tool when introducing your company’s items to other similar customers.

In addition, if you are in competition with another supplier for business from a customer, the company who can demonstrate successful adherence to vendor compliance requirements will gain the customer’s business, and even gain additional business if it is taken away from your competitor and given to you!

Stay 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, and then slack off. Better read the fine print of the contract you signed: the failure to adhere to any vendor compliance requirement may, and usually will, result in financial penalties known as “charge-backs” or “expense offsets”.

The financial penalties will usually be taken off one of your invoices by your customer, possibly months after the infraction occurred. Make sure you dedicate a person who is familiar with your business processes to researching each infraction. Do not use an infraction as a “witch hunt” for the guilty party. Instead, use it to identify problems in your processes or procedures and to then fix the problem. Maybe a person was not trained correctly on what to do, or maybe your barcode label printer has a bad print head and is failing to produce good quality labels.

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, and then follow-up to ensure you are refunded the money previously withheld. Proof of compliance can be found within EDI data or shipping paperwork from the carrier.

It is important to note that many large companies use “scorecards” to assess the compliance of their vendors; in essence, a tabulation of how a vendor is doing in complying with the rules. Vendors with lots of financial assessments will get unfavorable scores. Your customer may be reviewing vendor scorecards several times per year. Vendors with consistently unfavorable scores might be dropped by a company because of the added costs (mostly personnel) required in handling the business of a non-complying vendor.

Defining your own vendor compliance rules

As your company grows and becomes more adept at complying with the requirements of your customers, you might consider implementing compliance rules for your own vendors. Be kind! Keep in mind the troubles you went through trying to comply with the requirements of your customers. Also be aware that a compliance contract that allows you to financially penalize your vendors better be supported by the documented methods that you’ll use to judge the performance of your vendors, especially if you intend on assessing financial penalties upon your vendors for non-compliance.

Negotiations may be possible

Before committing to any potential customer, ask them if they have vendor compliance rules and get a copy to review so you know what you’re in for. Also, some companies will grant waivers on some or many compliance requirements to first-time vendors – they know it’s expensive to meet all the rules and regulations, especially the technical ones. Make sure you get the waiver in writing from the person at your customer’s company with the authority to do so: this may be the buyer, the vendor compliance manager, the information technology manager, or an accounting manager. And make sure that the waiver specifically states the requirement(s) being waived, i.e. the EDI advance ship notice and UCC-128 barcode labels, an electronic product catalog, etc. The waiver should include the timeframe, i.e. all orders within 6 months from the date of the first purchase order, the first 4 purchase orders (no date boundaries), etc. Thus, if your product does not do well in your customer’s stores, or does not really meet your customer’s manufacturing requirements, and is subsequently dropped after the first one or two orders, you have not made big financial investments for the sake of what turned out to be a short-term customer.