Congratulations! You�ve just landed your first big customer! No more selling to just the �mom-and-pop� stores � this is really going to give 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 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.
Vendor compliance rules are typical when doing business with the major retail department stores, specialty stores, grocery stores, office supply stores, automobile manufacturers and 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 you are probably thinking to yourself, �Is it worth the effort to comply with all these rules, and how much is this going to cost me?� 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 of 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 its processes via vendor compliance requirements, you can use your customer�s 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, get better racks and barcode label 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, which 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.
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 the software will allow you to grow into the efficiencies (i.e., using barcode scanners for inventory control) that your customers are utilizing.
While all of these 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.
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 that 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 chargebacks 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 the problem is 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 high 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. A scorecard is, 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.
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. Keep in mind the troubles you went through trying to comply with the requirements of your customers. And 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 to assess financial penalties upon your vendors for non-compliance.
Before committing, ask customers if they have vendor compliance rules, and get a copy to review so you have an idea of what to expect. 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 six months from the date of the first purchase order, the first four purchase orders, 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.
Norman Katz, president of Katzscan Inc. (www.katzscan.com), is a vendor compliance consultant with technical expertise in barcode applications and Electronic Data Interchange. You can e-mail him at normank@katzscan.com or call 877-922-7722.
