Driving Retail Supplier Compliance

As the Internet and an increasingly global economy continue to make the world smaller, retailers are finding new customers and suppliers by reaching farther across the globe. And, as retailing everywhere has become more competitive, successful retailers are looking to deploy sourcing and compliance management strategies that improve their operations and drive value to their customers.

Improved supplier compliance can lead to better inbound logistics, which can lead to lower costs, reduced inventory, better regulatory compliance and increased flexibility to respond to market uncertainties with lower risks. There are, however, a number of performance-related activities retailers must address to improve supplier coordination. Chief among these is developing a meaningful and effective supplier scorecard.

Whether expanding business with a current vendor or taking on new suppliers, retailers need transparency in their suppliers’ supply chains to minimize the risks associated with customer service levels, product safety and regulatory compliance. To achieve this, many retailers use a “balanced scorecard” approach that addresses four key areas of risks in the supply chain:

--Financial risks, which affect procurement costs, supply chain costs, regulatory compliance costs, resource utilization, personnel productivity, invoice accuracy and other impact to profitability.

--Supply chain risk, which exists when product quality, delivery service levels, fill rate allocations, supplier unresponsiveness, time to market for new products or errors to previously ordered customized or personalized merchandise have the potential to negate the retailer’s assurance of product supply.

--Quality risks, which increase when audits to the order fulfillment process uncover unmet product specifications, cargo loss or damage, packaging or labeling inaccuracies, process inefficiencies, poor data quality, or inaccurate product documentation.

--Risks to growth, which exist any time suppliers can’t see and respond to changes in market or social trends that shape demand.

Of the risks listed above, supply chain risks are the most critical for three reasons. First, if collectively unaddressed, they have an enormous impact on all other areas of risk. Second, supply chain risks aren’t borne by one party in the supply chain, but rather by all parties that collectively share these risks. Finally, supply chain risks are particularly disruptive, but with the right information, focus, tools and processes, they can be minimized.

Retail compliance scorecards focused on identifying and minimizing supply chain risks will typically cover the following areas:

Inventory performance indicators: These are used to measure how well suppliers, and their product inventory purchased by the retailer, are serving the needs of the retail customers and shareholders and how well the inventory is being controlled. They include:

--Gross margin ROI: This metric is calculated by multiplying the “maintained margin” multiplied by the inventory turnover rate.

-- Order-to-delivery lead time: The usual amount of time that elapses between placing a vendor purchase order for an item and receiving the goods.

-- Inventory turnover rate: The cost of sales divided by the average inventory level.

Customer service, order and delivery indicators: This approach identifies four major attributes:

--Percent on-time delivery: Measuring actual shipment delivery against a delivery window, a “must arrive by date” or “must ship by date.”

-- Percent shipped complete: Measuring the supplier’s performance to the goals of shipping complete orders. It compares the fill rate and line item specifications of the shipment against the original purchase order.

--Percent damage-free: Measuring the cargo loss and damage experience of a particular supplier’s receipts at the retailer’s stores and distribution centers.

-- Percent of documentation accuracy: Often, retailers expect an advance ship notice that is timely and accurate.

Store level and warehouse performance indicators: These metrics should define how well the retailer and its suppliers are satisfying customer demand and are preparing to meet future demand.

--Order out-of-stocks: At both the store and the distribution center, the level of inventory stock-outs of a key inventory buffer location can be a major supply chain failure.

-- Service levels: These goals typically measure the percent of in-stock of a particular item at the warehouse or store. Service levels dictate how retail replenishment solutions compensate for demand uncertainty within the retailer’s “safety stock” inventory investment.

Unlike other risks when managing supplier relationships, many supply chain risks often can be addressed before and during their actual occurrence. With the right level of real-time supply chain visibility, these risks often can be minimized.

Top retailers have pushed retail supply chain compliance well beyond just minimizing risk — they are now using scorecards to drive their vendors and suppliers in a direction that creates differentiation and growth. As a member of the retailer’s supply chain, suppliers enable success and help achieve high performance. This begins with suppliers understanding the retailer’s expectations and committing to support them by developing and deploying a plan throughout their organizations for timely and quality execution.

Many third-party logistics providers are attuned to helping retailers manage inbound supply by driving improved supplier compliance programs. This helps to improve efficiencies throughout the supply chain and allows retailers to better serve customers. Leveraging 3PL technology and expertise can ensure transport and warehouse operators, and suppliers are on the same technology platform, using standard business processes and are evaluated with a common, balanced scorecard.

Steve Robinson is senior vice president of operations-freight services at third-party logistics and technology provider Transplace. Contact him at steve.robinson@transplace.com

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