Vendor compliance guide

Vendors are an integral link within the supply chain of your business. Therefore, it’s critical that you develop a vendor compliance program.

vendor compliance

In the world of retail, vendor relationships are an integral facet of a business’s success. If you run a small business, it’s likely that your business relies on dozens (if not hundreds) of vendors to provide the various products and services required to operate.

Seeing as vendors are an integral link within the entire supply chain, it’s critical that you develop a vendor compliance program. A well-thought-out plan can reduce freight and supply chain logistics costs, accelerate order processing, and improve customer satisfaction.

But what does good vendor compliance look like, and why is it important? Let’s find out.

What is vendor compliance?

From the moment you make an order to the time you receive the shipment, there are dozens of things that can go wrong along any supply chain. For instance, the order could be shipped to the wrong location, it could be incomplete, or goods might arrive damaged.

Whatever the problem, when an order misses the mark, it often results in finger-pointing and a bunch of back and forth discussions as the consignee and the supplier attempt to determine what went wrong.

Vendor compliance involves setting requirements that lead to a shipment arriving exactly how, when, and where it was ordered. A vendor is compliant when it ships a retailer’s purchase order in such a way that it follows the retailer’s exact stipulations.

What is a vendor compliance program?

A vendor compliance program not only improves the likelihood that an order will arrive as expected, but it also helps both parties resolve problems when a shipment misses its mark.

Your program should include a requirements document that explicitly spells out your business’s compliance requirements, expectations, and penalties for missteps. Some vendor compliance programs are basic—since sometimes that’s all that’s required—whereas other programs take a more strategic approach toward optimizing their supply chains.

The urgency to achieve improved shipments, in part, compliance programs has become more important than ever thanks to a number of factors, including:

  • Supply chains are longer and faster, so errors cause larger issues
  • Customers are less willing to forgive suppliers for noncompliance
  • Direct shipping from vendors for e-commerce purchase orders has increased
  • Technology has made it easier to see and improve supply chain processes
  • Efficiency is imperative, particularly for retailers

There are significant costs for noncompliance. They include delays in merchandise availability, order fulfillment, reduced satisfaction, and lower levels of customer trust. Any of these problems could cause real and lasting harm to your business.

How to build a vendor compliance program

When it comes to building a vendor compliance program, it takes a village.

The policies and processes of the program should be developed by an internal team of key players from various operational centers, including:

  • Inventory control
  • Merchants
  • Fulfillment center
  • Accounting personnel

Together, your committee can determine what’s going on in your business and identify the areas of greatest concern. Although each company is different, almost every one will at least address these two critical areas:

  1. On-time delivery – Which reduces backorders and eliminates headaches.
  2. Inbound routing guides – Which streamlines shipments and reduces freight costs.

To prevent vendor-related problems from impacting your profitability, it’s important that you’re exhaustive when it comes time to build out your policies. A well-defined document will remove ambiguities and prevent disputes, resulting in an improved vendor relationship.

Consider your costs

There are dozens of problems that noncompliance can cause across accounting, merchandising, and fulfillment. It’s important to identify and then prioritize your largest costs.

Common problems caused by noncompliance include:

  • Lost sales and back orders
  • Processing delays
  • Increased inbound freight costs
  • Unauthorized product substitutions
  • Paperwork and accounting reconciliation
  • Automated document processing

By accounting for the various costs and their impact on profitability, you can clearly see what the lack of a vendor compliance program is having on your overall operation. It also paints a roadmap for moving forward!

Appraise your vendors

Some vendors may be more efficient and cause fewer issues than others. It’s critical to assess each vendor by revenues, unit volume, and costs.

The best way to objectively gauge a vendor’s value involves creating a vendor scorecard or ranking system.

The goal is twofold:

  1. Fix the vendors that are fixable or account for a large share of business.
  2. Drop the vendors that don’t merit the time and effort.

Build out your vendor compliance program

There are dozens if not hundreds of topics to consider when creating a vendor compliance manual. This is why it’s so critical to have a team that’s intimately familiar with all areas of your operation along the entire supply chain.

Elements to consider in a vendor compliance program include:

  • Contact list
  • Service standards
  • On-time delivery to committed delivery date
  • Product handling, quality and packaging
  • Products delivered in safe condition and in agreed-upon manner
  • Marking and labeling guidelines
  • Supply chain system requirements
  • Accounting and paperwork requirements
  • Routing guides
  • Delivery Scheduling appointments
  • Direct-to-store requirements
  • Cross-docking requirements
  • Charge-backs scheduling and management for vendor noncompliance
  • Customer returns

Although it may seem like a lot, all of this is meant to set expectations, clarify commitments, and streamline processes.

To ensure that your vendors are in compliance, make the document as clear, concise, and precise as possible. This will eliminate mix-ups and confusion as well as indicate who’s at fault if a purchase order doesn’t arrive when, where, and how it was expected to.

Use chargebacks as a motivation, not punishment

Noncompliance mistakes are an inevitable part of doing business. You can’t eliminate them entirely, but you can reduce them.

Although noncompliance penalties are an important aspect of chargeback scheduling, the goal is to reduce noncompliance, not recoup costs by levying charges against vendors.

Let vendors know that on-time shipments and accurate orders are far more important to you than fines. And if you have a long-established relationship with a key vendor, consider reducing or canceling chargeback fees if they only make mistakes infrequently.

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It’s all about communication

At the end of the day, vendor compliance guidelines are meant to increase communication and set expectations between both parties.

When done the right way, it benefits both sides.

So, don’t be scared to dive into the nitty-gritty of policy. Don’t fear rocking the boat. This is a fantastic opportunity to strengthen your vendor relationship and to improve the efficacy of your operation.

By being purposeful and creating unambiguous compliance guidelines, you set your business up to succeed. And to protect your business from the inherent risk it faces, you can always count on Thimble.

Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.

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