Vendor Compliance: If you are not watching your dollar, who is?

Many companies do not have vendor compliance programs in place to hold vendors accountable for delivering goods as ordered and as agreed upon; and the ability to track this is something every company should have as a mechanism to control spending. Specifically, an effective vendor compliance program should include a system to measure and improve a vendor’s adherence to Standard Shipping Instructions (SSI) and Service Level Agreements (SLA). Companies that lack a methodology to monitor and enforce vendor compliance will see a variety of situations that will likely result in adverse impacts to cost and service level. By establishing and enforcing an effective vendor compliance program, companies should be better positioned to drive vendor behavior that is aligned with desired product purchasing decisions. Improved control can give companies the ability to know that they are receiving the appropriate pricing and expected service. Vendor compliance issues occur when vendors make decisions that differ from the defined operating standards, SSI or SLA that have been established. Vendors often make passively noncompliant decisions due to a lack of knowledge of or an inability to access SSI and SLA. In other situations the decision not to comply is more deliberate. For example, the requirement to use a master bill of lading may slow down a vendor’s outbound shipping process, creating unwanted bottlenecks. In either case, the result is that a vendor may make decisions that can dramatically increase merchandise costs for the consignee. To increase the likelihood that merchandise dollars are spent as desired, companies must develop a vendor compliance strategy and process that aligns the actions of their vendors with their own objectives. Importance of creating an effective vendor compliance program Companies that have vendor compliance programs do so to guard against distribution inefficiency. These inefficiencies usually drive unnecessary cost in both distribution center and transportation operations. Effective vendor compliance programs can generate value for a firm by driving vendors to deliver merchandise as planned. This should help ensure that contracted volumes and discounts are met and help foster better relationships with service providers that can result in service level improvements. By actually sticking to the carriers in the core carrier program, the consignee should be better positioned to realize the administrative benefits of managing a small number of carriers. With good metrics in place the consignee can target inefficiencies such as the failure to consolidate under a master bill of lading. Simple metrics such as shipments per day by lane allow the consignee to identify situations where process changes can be used to drive smarter, more efficient mode selection. Often, such changes are simply a matter of making tweaks to the ordering pattern or required delivery time.

“quick wins” may include monitoring and enforcing on-time accuracy by vendors. For example. In our labeling example. In both of these situations. but the indirect nature of their benefits often puts them in a lower priority with respect to other efforts where the results may be more easily quantified and traced. short and long-term cost savings opportunities should be identified and outlined. Begin with identifying “quick wins” where the process for capturing compliance savings can be piloted as a proof of concept to gain support and momentum for the effort. First. ASN Accuracy 4. Second. compliance programs are an enabler of savings. Pre-Ticketing/Pre-Hanging . Reasons companies have difficulty monitoring vendor compliance Despite the benefits. vendor compliance programs become a mechanism to bring the consignee’s buyers and the supplier together to discuss transportation and distribution center cost. It is important that those groups support the initiative and are willing to cross functionally develop an effective program. Once the process is stable and credible. most people will agree that proper labeling has tremendous benefits in terms of distribution center or crossdock throughput and the resultant decrease in labor costs.More often than not. there are reasons why some organizations fail to pursue vendor compliance programs. On-Time Accuracy 2. Inspect Labeling and Packaging Reduce/eliminate inventory overage/shortages Control modal selection and reduce wasted shipping velocity Reduce cost and increase efficiency by using electronic processes Decrease time and effort spent correcting shipments that are non adherent to SSI Improve order fulfillment and accuracy 5. Next. One such process involves monitoring irregularities between purchase order ship points and those on the corresponding freight invoice to identify situations where shippers may be fulfilling orders from locations other than those expected. the underlying issue is that vendor compliance is not easy without the proper decision support systems to reduce the workload of such programs. tackle those more complex and difficult to measure situations where benefits are less easily attained. Many companies find that such programs are as much about keeping their internal decision making in check as they are about keeping vendors in check. Manage Premium Freight Usage 3. Over time. measuring categories such as labeling compliance can be difficult to quantify and track over time. more active steps such as charge backs can help to increase savings from the vendor compliance program. Furthermore. but measuring the number of noncompliant labels is not easy. Top 5 Most Common Opportunities Missed Due to Lack of a Vendor Compliance Program 1. Implementing an effective vendor compliance program The first step to consider in implementing an effective vendor compliance program is to gain support from firm leadership and affected business units. firms may not always have the ability to assemble certain resources or key processes to monitor and track compliance.

you Seth Green Manager. Deloitte is not.While cost savings numbers can vary by situation. rendering business. driving desired mode and carrier selection along with other cost conscious transportation decisions. we have seen firms that have implemented an effective vendor compliance program quickly achieve a 10% reduction in distribution costs. As used in this document. . Deloitte Consulting LLP tfossey@deloitte. nor should it be used as a basis for any decision or action that may affect your business. and related entities shall not be responsible for any loss sustained by any person who relies on this publication. or other professional advice or services. Authors Frank Monte Senior Manager. Deloitte. So ask yourself. investment. Member of Deloitte Touche Tohmatsu Copyright © 2009 Deloitte Development LLC. Before making any decision or taking any action that may affect your business. Deloitte Consulting LLP fmonte@deloitte. by means of this publication. Deloitte Consulting LLP segreen@deloitte. who is watching your dollar? With a vendor compliance program in place. you should consult a qualified professional advisor. This publication is not a substitute for such professional advice or services. Tamara Fossey Business Analyst. Please see deloitte. ‘Deloitte’ means Deloitte LLP (and its subsidiaries). An effective vendor compliance program will drive vendors to follow SSI and for a detailed description of the legal structure of Deloitte LLP and its This publication contains general information only and is based on the experiences and research of Deloitte practitioners. its affiliates. All rights reserved.

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