Business Monday

Outsourcing vendors? Make sure they comply with the rules

The South Florida region is rich with entrepreneurial start-ups and established firms, some national leaders, selling a wide range of consumer products. For many of these companies their businesses have been very successful as local and regional enterprises, but they wish to realize their dreams as U.S. national competitors on a grander scale.

But these dreams can quickly turn to nightmares if not thought through carefully, where profits can be wiped out by the financial penalties that accompany the failure to comply with supply chain vendor compliance requirements. Known as chargebacks in the retail industry, which in my over 21 years of multi-industry vendor compliance experience also is the industry with the reputation as being the most notorious for the levying of these financial penalties and for its extensive vendor requirements, these costs will eat away at profits if not managed with commitment.

To realize the benefits of efficiency, it is important for large enterprises such as retailers and major manufacturers to have their vendors comply with a single set of rules comprised of accepted standards and industry guidelines. A typical large retailer can have anywhere from several thousand to more than ten thousand vendors and it would be operationally impossible — not to mention financially impractical — otherwise.

Vendor compliance requirements include barcode labeling for items, cartons, and pallets; shipment scheduling and paperwork (e.g. the pack list and bill of lading); packing requirements (carton and pallet stacking); a uniform means of communication (typically electronically via Electronic Data Interchange, aka EDI); which freight carriers to use depending on shipment size (small package, less-than-truckload, truckload) and ship-from/ship-to; “floor-ready” packaging such as standard hangars and wrinkle-free packing; and more.

The solution to successful compliance is to understand that the answer lies in both technological and operational excellence. Barcode labeling and EDI technologies are readily available, but without tight-running operations and a commitment to perfection, costly mistakes will occur.

Buying organizations such as retailers have little patience for poor-performing vendors, especially for commoditized items and when competitors are constantly knocking on their doors. Improving operations and implementing technology — including integrating technology into existing software and operational infrastructures — is where many vendor organizations struggle. These technologies can, and should, be used internally to improve the vendor organization’s performance and analytical insights, and can be leveraged against the capabilities of a competitor.

Outsourcing manufacturing and distribution makes strategic sense for many vendors. But remember that just because you outsourced a process, it does not mean that you are still not responsible for it: Your customers will penalize you, not your contract manufacturer or distributor, for vendor compliance failures, so continual monitoring and management of your vendor’s performance is needed. You must fully understand what your vendors are doing. You should fully understand what data your vendors have access to in the performance of their outsourced work.

Don’t begrudgingly implement technology and operations improvements just because you have to and then turn a cold shoulder to it. Understand that it is a strategic investment and learn how you can benefit from it. The successful vendor is one who becomes more intelligent than its customers and its competitors.

Norman Katz is president of Katzscan Inc. in Pompano Beach. or normank@

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