In the world of procurement, smart relationship management plays a critical part in any successful interaction, internal or external. But when it comes to building strong, mutually beneficial relationships in your supply chain while also reducing costs, an efficient and effective vendor compliance program is non-negotiable. Taking the time to draft and implement a thorough vendor compliance policy that includes charge-backs where necessary can reduce expenses while improving efficiency.
Why Vendor Compliance Matters
In an ideal universe, vendors would happily and enthusiastically comply with the terms and conditions with flawless accuracy. Every order would be a perfect order. But here in the real world, companies rely on vendor compliance programs as an essential part of successful vendor management. Without some kind of formalized vendor compliance policy, your company will find itself on the hook for costs generated by non-compliance. Some of these costs are obvious, such as late delivery, improperly routed shipments, shipments filled with the wrong product (which can create backorders and increased transportation costs), or unauthorized replacement items for existing orders. Other costs may not be immediately clear, but are just as extensive, including labor (for time spent tracking down missing information or items) and additional packaging, shipping, and handling.
A solid vendor compliance program is essential for using high-tech supply chain management tools, including just-in-time inventory systems, Advance Ship Notice (ASN) programs, source marking/ticketing, and RFID. And, more importantly, it will help you avoid wasting time on chargebacks, disputes, and recovery claims.
Perhaps understandably, some vendors may chafe at the paperwork requirements and perceived hassle that comes with comprehensive compliance requirements. In turn, this can cause concern internally for your staff, who have likely spent a lot of time and effort building strong vendor relationships. You can assuage fears on both sides by crafting a vendor compliance program focused on reducing costs, improving customer service, and maximizing value for the company as a whole. To do so, you’ll need a vendor compliance policy that explicitly and clearly explains compliance requirements and expectations, and potential consequences of non-compliance. By focusing on the areas of greatest concern, you’ll be able to eliminate confusion and miscommunication and support the development of even stronger relationships with your suppliers.
Key Components of a Successful Vendor Compliance Program
The impact of noncompliance is felt across your entire business, in every department. Consequently, bringing together key stakeholders from accounting, operations, shipping, and procurement is important to drafting a policy that motivates vendors to comply while focusing on cost reduction (for both direct and indirect costs of noncompliance).
When drafting your vendor compliance policy, the areas of greatest concern include (but are not limited to):
- Your company’s history, goals, and customer service standards.
- On-time delivery with regard to committed delivery date
- Costs related to backorders and order processing
- Product handling, including:
- Correct items, delivered in good condition and using prescribed methods
- Product quality and packaging as specified in the compliance policy
- Compliance with supply chain software or systems (electronic purchase orders (electronic POs), ASNs, etc.)
- Labeling guidelines
- Paperwork requirements for all shipments, including accounting-related documentation
- Logistics, including:
- Inbound routing guides for lowest-cost shipping
- Delivery scheduling
- Chargeback management and detailed noncompliance fines related to (for example):
- Improper PO numbers
- Incorrect labels or label placement
- No packing list, incomplete packing list, or incorrect placement of packing list
- Bill of lading not complete
- Unauthorized product substitution
- Late delivery (with or without associated backorders)
- Out-of-spec product packaging
- Early shipment without approval
- Merchandise required 100% inspection
- Products shipped without following routing guide
- Damaged merchandise (not caused by carrier)
- Failure to protect fragile merchandise
- Delivery to wrong address
- Delivery without appointment
- Customer returns and credits
- Detailed contact information for all relevant parties, including:
- Accounts payable
How to Ensure Vendor Compliance
Building a winning policy that strengthens both compliance and vendor relationships doesn’t have to be a struggle. Following a few key tips can put your trading partners on the path to compliance—and your company on the path to a stronger bottom line.
- Start Strategically
Identify and engage all internal stakeholders and solicit their input on vendor compliance policy. Assign roles and responsibilities as relevant, and make sure you’ve clearly communicated expectations and accountability. As a team, identify the biggest challenges with regard to vendor compliance and develop a strategy designed to address them.
- Focus on Chargebacks and Backorders
Individual costs generated by a backorder might seem small, but those nibbles add up to a big bite out of your bottom line. Any policy you develop should have a strong focus on eliminating the often substantial cost of backorders to maximize profitability—and assigning chargebacks that motivate compliance without destroying vendor relationships.
- Maximize Convenience for Better Compliance
Short and sweet is the name of the game. Vendor risk management and vendor compliance both work best with clear and consistent expectations—and ramifications for noncompliance. Focus on brevity and clarity for best results.
Request that your suppliers agree to your vendor compliance policy as a requirement for doing business with your organization. Make it easy for them to review your policies and requirements by posting them to your website.
- Use Chargebacks to Motivate, Not Punish
Mistakes happen, but they needn’t ruin the relationships you’ve built with your suppliers. Noncompliance penalties are at the core of any effective chargeback schedule, but you’ll likely see optimal results if you make it clear to vendors that on-time, accurate shipments mean far more to your company than any fines you might collect.
If a vendor has a strong track record, you might even consider reducing or canceling chargeback fees on the rare error.
- Slow and Steady Wins the Race
Change takes time. Stage your policy implementation over several months, and give your suppliers time to understand and implement your policies. During the initial stages of implementation, you can monitor vendor performance and compliance, and make adjustments as necessary.
You can also do a “test run,” introducing the policy to vendors whose increased compliance would have the biggest impact on cost control, and then expand your implementation as desired.
- Clear Communication is Key
Ultimately, compliance management is beneficial to both your company and the vendors who supply you. Don’t be afraid to lay it all out, or ask (and answer!) questions. This is a powerful opportunity to strengthen vendor relationships and provide clear, unambiguous guidelines while also stressing how important each vendor is to your company and your desire to build a mutually beneficial arrangement.
A Policy for Profitability
Strong vendor management—and the relationships it builds—begins with strong, clear, and easy-to-follow compliance. You can achieve substantial cost reductions, improve efficiency, and develop lucrative arrangements with your suppliers by making vendor compliance a key part of your procurement program.