Abusive compliance practices hurt retailers and their suppliers

KateVitasek_100.jpgVendor compliance programs have become a major roadblock to retail store success. But who is to blame? Retailers and suppliers point that finger at each other. One expert says there is a “state of chaos” with retailer vendor compliance programs for both bricks-and-mortar and online stores.

A Supply Chain Digest Retail-Vendor Benchmark Study does not hold back, asserting, “To state the current business environment is a challenging one for both retailers and manufacturers is putting it mildly.” Consultant and author Norman Katz of Katzscan Inc. is more harsh in a stinging critique of retailer vendor compliance practices in his recent Journal of Supply Chain Management, Logistics and Procurement (Vol. 1 – No. 3) article titled “How Abusive Vendor Compliance Programs are Affecting Retail Store Success.”

Kate Vitasek, Professor in Supply Chain Management at the University of Tennessee, unpacks the effects of vendor compliance practices used by Retailers.

Vendor compliance comprises the operational and technical mandates that customer buying organisations demand of their product vendors/suppliers as a condition for doing business. Compliance guidelines involve technical requirements for the electronic exchange of business transactions such as purchase orders, invoices, and the use of automatic identification: barcode labelling, RFID for carton and pallet tracking.

Operational requirements include floor-ready requirements, carrier specifications and routing guidance, weight and size restrictions, documentation, format guidelines and whether pallets are used or not.

Then there are legal compliance issues, child labour regulations, item content clauses, test requirements, and contact information.

Katz asserts in his journal article, “Supply chain vendor compliance programs have become too muddled and too corrupted to be functional and workable anymore.”

The problems

It’s easy to understand the magnitude of the problem when you think about the sheer scale of the retail industry. Things can get complicated very quickly because a typical retailer might have anywhere between a few thousand to 10 000 or more vendors supplying its products. So uniform vendor guidelines are an “absolute necessity,” Katz says.

A key issue is that retailers can’t even agree on simple terminologies for sale and shipping dates. He adds, “A basic fundamental fact is that the retail industry has not addressed the idea of consolidating various terms in order to create a single date on a purchase that simply signifies when a purchase is no longer valid. They have a multiplicity of confusing, semantically similar date discernment terms.” He warns these subtle definitional differences can create a costly ‘gotcha’ situation for vendors to wade through.

Another cumbersome problem is that standards for code sets are sometimes not adhered to by retailers, or they are “corrupted in order to cover inadequacies in their order processing systems.” This causes data corruption down the line, within the order processing and EDI systems used by vendors. Costly work-arounds by the vendor community are thus required, “adding unnecessary time and expense to supply chain requirement implementations.”

“Vendor compliance guidelines are too often written using retailer-specific terms to describe general industry concepts. “One egregious example is the variety of ways that retailers coin their own terms for a distribution centre: store fulfilment centre, store support centre, distribution supply centre or direct fulfilment centre. “Worse is when multiple terms are used by the same retailer by teams often representing different business models,” Katz says.

Katz’s message to retailers? “Vendors really do not care: a distribution centre is a building to which vendors ship their product, plain and simple. Retailers need to keep terms and definitions simple and clear.”

Katz’s logic is one followed by other prominent supply chain professionals such as Brian Gibson – a professor at Auburn University who is well-known for his expertise on the topic of retail compliance. Both agree that a distribution centre by any other name is still a distribution centre, so why make it complicated?

Gibson adds, “Omnichannel has caused the variety of ship-to points for a retailer to grow but the compliance rules should not be vastly different for each location type. The goal is the same: right product in the right colours, sizes and quantities to the right location at the right time with accurate documentation and advanced shipping notification.”

The abuses

While no one is happy with the state of the industry, vendors are the least happy because it is they who suffer through penalties in terms of compliance chargebacks. A chargeback is a fee a retailer assesses when it perceives a supplier is not complying.

Many go so far as to claim retailers are abusive in nature; a common complaint of retail compliance programs is that they are a “profit centre” for many retailers. The Benchmark Study validates this, stating that only 35% of retailers say their compliance programs are primarily focused on supply chain improvement. In fact, a full 23% of retailers admit their programs are “dollar-oriented.”

The Retail Value Chain Federation admits that vendor compliance programs are full of negativity and penalty-based programs. “In recent years, we’ve seen a lot of new faces in vendor compliance. Many of these folks don’t have the old-school training that was common years ago, and some have very limited experience in the retail industry. By no fault of their own, they’re thrown to the wolves and told to chase the money, which is the equivalent of chasing your tail. If you don’t understand vendor compliance and why it exists, the root cause of deductions will never be addressed, and problems will never be solved.”

The way forward

Katz, Gibson and the Federation all agree: the current state of vendor compliance must change.

It’s ironic when you think about it. It is an industry that wants to deploy cutting-edge technologies such as facial recognition, Artificial Intelligence, data analytics, and hand-held devices to improve the customer experience. Yet the retail industry still relies on 40-year-old technologies, such as barcodes and Electronic Data Interchange (EDI), as the backbone of its vendor-supported supply chains.

The Federation points to collaboration as a key to success. “When you succeed at vendor compliance, you don’t have to chase money. The supply chain is optimised. Profits are maximised. Returns, out-of-stocks and markdowns are reduced. Customers are satisfied. Both sides of the trading partner relationship benefit.”

The keywords are partner relationships. Katz has uncovered a distinct need for honesty, trust and collaboration among retailers and their vendors.

Unfortunately, according to the Benchmark Study, less than half of retailers are ranked “above average” at collaboration. Given the emerging tariff and trade environment facing retailers and their suppliers, it’s time to step up and work together to forge real win-win partnerships.

Katz suggests that simplifying terminology, sticking to standards, reducing variations and editing documentation for clarity all go a long way to reducing frustrating disruption. His Journal of Supply Chain Management, Logistics and Procurement article recommends:

• There needs to be a return to the purpose of vendor compliance, which is to create a uniform set of guidelines by which all will interact – technically and operationally – with the buyer organisation.
• The retail industry should simplify and streamline its requirements; costs relating to internal and external confusion will be reduced and compliance rates will increase. Supply chain disruptions will decrease.
• The purpose of vendor compliance cannot be a profit centre for the retailer. Parties need to work together and there needs to be open honesty.
• Retailers need to recognise that vendors are as valuable as customers. They should invest to make vendor compliance better.
• Retailers should open themselves to new ideas and new vendors. The money saved from reducing the costs of vendor compliance can be shifted to innovative product outreach programs.
• Make space on the e-shelf for the smaller, less sophisticated vendor in an online area dedicated to products from innovative vendors. This could lead to a multi-tiered vendor compliance program or a fast track vendor compliance option for smaller newbies.

Gibson concurs with the recommendations and adds that by providing better clarity of the chargeback reason or cause, retailers will help vendors improve. “If a vendor truly doesn’t know why they are being assessed a chargeback, then they are left to guess. Retailers need to take a moment to provide clarity – email a photograph of the error, provide documentation or pick up the phone and explain it directly. That will help vendors understand the error, address the root cause of the problem and prevent it from recurring.”

The bottom line? It is the bottom line. In a time when brick and mortar retailers are struggling with their business models against their online competitors, vendor compliance programs are an overlooked opportunity because they can and should be used drive more efficient supply chain relationships.


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