Jumping Through Hoops: The Importance of Vendor Compliance

If your company sells to manufacturers, retailers, or distributors, you’re probably all too familiar with vendor requirements manuals and routing guides. Companies publish those documents to make sure the goods they order from suppliers arrive when, where, and exactly the way they expect.

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Working Together to Achieve Compliance

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The contents of requirements manuals varies, but most cover topics such as how to pack shipping cartons, how to lay out and place shipping labels, what information must appear on a packing slip, acceptable pallet dimensions, must-arrive-by date, and how to communicate status updates.

It’s hard enough for businesses to meet a different, detailed set of demands for each customer, but it is especially difficult for small companies. Without sophisticated software or a large staff, a vendor might be hard-pressed, for example, to pack its products 12 to a case for one customer, 10 to a case for another, and 24 to a case in eight multipacks for a third—then place all the bar codes and labels precisely where they belong.

And unlike companies that sell in vast volumes, small suppliers lack the negotiating clout to get customers to bend the rules. “Small suppliers have to jump through hoops a bit more,” admits Scott Morgan, vice president of transportation strategies at DSC Logistics, a third-party logistics provider based in Des Plaines, Ill.

Tough though the challenge might be, meeting customer requirements is essential. “If they don’t comply with customer requests, they don’t stay vendors for long,” says Jim Muir, president of consulting firm Logistics SSI in Farmington Hills, Mich.

Vendors who get the details wrong also risk chargebacks—financial penalties that customers impose to compensate for the extra work they have to do when goods don’t arrive the way they expect.

Whether they perform the work themselves, outsource to service providers, or combine those strategies, small suppliers must satisfy all their customers’ demands, no matter how varied and complex.

Although a vendor serving any kind of company must meet customer requirements, the retail industry is especially noted for its detailed lists of demands. Retailers publish requirements manuals in order to achieve consistent performance.

Why So Many Rules?

“Vendor requirements help ensure that the entire community is operating not only the same way, but at the same high standards,” says Casey Chroust, executive vice president, retail operations at the Retail Industry Leaders Association in Arlington, Va.

According to Chroust, retailer requirements fall into four categories:

1. Performance — including accurate orders, undamaged product, and on-time arrivals.
2. Process — how the vendor engages and communicates with the retailer.
3. Social — including environmental sustainability and social responsibility in manufacturing.
4. Legal — adherence to government regulations.

For vendors distributing product to multiple retailers, one vexing mandate category concerns packaging. The rules involve both the number of items in a carton and how they’re packaged within the case. Even when two retailers ask for 48 pieces to a case, one might specify eight boxes of six and the other six boxes of eight.

Retailers make these rules to accommodate stores that don’t need full-case quantities. “They can open the case and pick those multipacks for smaller-volume requirements at the store level,” Chroust says.

Vendors often work with third-party logistics (3PL) providers that shoulder the burden of matching case counts to customer needs. “One vendor might ship a product to us in a case pack of six, but Target wants it in case packs of three. So we do a lot of reworks,” says Clark Koch, director of operations at Regal Logistics, a 3PL in Fife, Wash.

Ready, Willing, and Label

Retailers’ label specifications can also be diverse and complex. “Some want the label on the upper left corner, for example, and some specify that it be on the widest side of the box, two inches from the bottom of the carton and two inches from the farthest right point,” says Jeffrey Schmidt, director of operations at The Wheat Group, a small San Diego firm that makes accessories under licensed brand names such as Puma, Hurley, and Skull Candy.

Those specs aren’t arbitrary; they’re designed to match processes in the retailer’s distribution center (DC). A process change—for instance, if the retailer installs a new conveyor system—can trigger a change in labeling requirements.

“Instead of being three inches from the bottom right, a retailer’s new scanner may need the label to be three inches from the top left,” says Kevin Wicks, vice president of business development at Daryl Flood Logistics in Coppell, Texas.

Some retailers set strict rules for when shipments must show up at their docks. Walmart is a prime example. “Vendors have to meet not only the delivery date, but also the time Walmart specifies,” says Darrell Graham, president and chief executive officer of FSD Inc., a Palmyra, Ind., company that holds a license to produce the Steak ‘n’ Shake restaurant chain’s chili recipe for sale in stores.

Meeting Walmart’s delivery date requirements is also a big concern for Regal Logistics and some of its customers. “We work closely with Walmart’s transportation group in Bentonville, Ark.,” Koch says.

Carriers pool their equipment at Regal’s DC so the 3PL can preload the trailers as soon as vendors relay their orders from Walmart. “That process ensures that we hit Walmart’s must-arrive-by dates,” Koch adds.

Requirements for electronic communications—such as electronic data interchange (EDI) message 856, the advance shipping notice—can place a particular burden on small firms, especially those that manage such messaging in-house.

“Most of our major customers require EDI processing capability,” says Matt Hopkins, operations manager at King Par, a Flushing, Mich., company that sells golf equipment and accessories under the brand names Intech, Knight, Affinity, and Orlimar. King Par’s 65 employees include information technology specialists who currently handle EDI in-house. But when the company upgrades to a new computer system, it will start using an EDI vendor.

“I would use a third party if I were starting from scratch,” Hopkins says. Those service providers already have the infrastructure in place to create electronic messages that match the needs of many retailers. “All you do is tell them you’re working with Walmart, and they supply its requirements,” he says.

Small companies that rely on 3PLs for distribution can skip the worry about EDI entirely because those partners take care of the electronic messaging. And, fortunately for small do-it-yourselfers who lack the resources to conduct full EDI transactions, many retailers provide online “smart forms” to capture the data they need.

“Vendors go to certain Web sites and key in the information, which gets translated into EDI through the retailers’ system,” says Chroust.

Here’s a closer look at how five small vendors jump through hoops to meet the requirements in their customers’ vendor guides.

ErgoDig: Digging in with a 3PL

When William Rogers launched ErgoDig in 2011, he thought retailers would pick up his products at the point of manufacture in China. He soon learned that those customers are unlikely to extend such Freight on Board (FOB) terms to a small, new supplier. “They all want suppliers to have a domestic program in place,” Rogers says.

Not only did prospective customers expect ErgoDig to deliver product all the way to their DCs, but they wanted proof that the fledgling company could do the job right.

That meant Rogers had to outsource. “One of the first questions a customer asks a newly launched company is which 3PL it uses,” he says.

With offices in College Station, Texas, and Qingdao, China, ErgoDig designs and markets ergonomic garden tools for residential and commercial use. To meet retailer requirements for a U.S. logistics operation, ErgoDig contracted with Daryl Flood Logistics.

As ErgoDig brings its products to market in 2012, its contract manufacturer in China will arrange transportation to the United States. Then Daryl Flood will take over, managing shipments from its DC to ErgoDig’s customers.

The 3PL will be responsible for compliance issues such as how each retailer wants ErgoDig’s rakes, shovels, and other products boxed for shipment.

“Retailers might want our products packed in bundles of three or six, or they might want them in a crate,” Rogers says.

It’s not practical to build those custom-packed shipments in China because the boxes take up too much room in a shipping container. “We ship as many products as we can fit in the U.S.-bound container, then the 3PL neatly repackages them to retailer specifications,” Rogers says.

To help small companies meet the broad spectrum of retailer requirements they encounter, Daryl Flood has invested more than $2 million in information technology, including a warehouse management system from HighJump Software, Eden Prairie, Minn.

“The software allows customers to add different types of labels and accommodate varied requirements for picking, packing, full case loads, and shipping,” says Chad Pack, director of business solutions at the 3PL. “Because Daryl Flood has made this technology investment, our customers don’t need to.”

JTD Enterprise: Don’t Be Afraid

Variety represents a major challenge for small suppliers trying to satisfy the requirements of multiple customers. “Suppliers have to set up a separate system for every retailer they deal with,” says Tom Nihra, vice president of JTD Enterprise in Warren, Mich.

A second-generation family business with $2 million in annual sales, JTD sells golf ball retrievers and portable flagpoles to large retail customers such as Target, Sam’s Club, Amazon, and Academy Sports, as well as to small outlets such as college bookstores.

Shipping labels pose a particular challenge for JTD, because some retailers are very particular about how to lay out the information. Fortunately, those customers offer help in the design stage. To test the process, JTD sends a proof of the new label, and the retailer provides approval or requests for changes.

Not all retailers are that finicky. “Other customers just dictate 10 fields that need to appear on the label,” says Nihra. “They don’t care how it’s laid out, as long as all the fields are present.”

Like other vendors, JTD must adhere to a variety of packaging rules. “Retailers have requirements about how a shipment has to be marked if it contains mixed stockkeeping units,” Nihra says. “We need to mark the box differently if the contents are all the same product.”

JTD’s general manager and packaging supervisor work out the packaging strategies order by order.

Although JTD’s in-house staff grapples with most vendor requirements on its own, it uses a third party to manage EDI communications with Academy Sports and Target. For other retailers, JTD’s employees enter the necessary data into online forms linked to the retailer’s information system.

One key to getting vendor compliance right is communicating with customers. “A company shouldn’t be afraid to ask for help just because it’s small,” says Nihra. Because small vendors often offer unique products, large retailers want them to succeed. “They genuinely try to help small businesses comply with their requirements,” he adds.

King Par: Change is Par for the Course

Along with managing its own EDI, King Par also relies on its staff to stay current on packaging requirements. One big challenge is that those mandates can change at any time. For instance, Academy Sports decided in early 2012 that it wanted a certain golf club in two-packs instead of three-packs.

With some customers, King Par sells enough product to make it feasible to pack and label orders to their specifications overseas, where labor is cheaper, then ship it directly to the customer. But when the company sells the same item in smaller quantities to multiple customers, the strategy is different. “We import it in a standard six-pack, then re-box and re-label it ourselves,” Hopkins says.

Occasionally, King Par’s compliance team encounters a requirement it simply can’t meet, mainly because its platform dates back to 1998 and doesn’t offer the flexibility of newer systems. This became a problem, for example, when Walmart.com asked King Par to start providing not just a few items but its entire line to the e-commerce channel.

“One requirement was an EDI feature that our system couldn’t provide,” Hopkins says. “We had to say we weren’t capable of meeting that requirement, which was a no-go for Walmart.com.” Eventually, the IT staff developed a workaround, allowing King Par to expand its relationship with the online vendor.

The Wheat Group: You Can Never Be Too Redundant

Like King Par, The Wheat Group conducts some compliance activities before its products reach U.S. soil. “A retailer such as Macy’s may want a hang tag in a certain style, with pricing in a particular font,” says Schmidt. “We do that upstream at the factories when possible.”

But most work-related packaging and shipping requirements take place at The Wheat Group’s DC in Otay, Calif. For each of the company’s top 20 customers, it assigns specific staff to be responsible for compliance. “You can never be too redundant when it comes to compliance,” says Kelly Grismer, The Wheat Group’s president. “Use every tool you can to enhance the process and eliminate potential errors.”

The Wheat Group also relies on help from UPS, its exclusive carrier for shipments into the United States, and preferred carrier for shipments to customers. UPS’s shipping application, WorldShip, allows vendors to configure a profile for each customer, which helps automate compliance activities.

“If The Wheat Group ships directly to Target, for example, it can set up a profile that specifies the required fields for every purchase order associated with Target,” says Kiel Harkness, retail segment strategist at UPS. “Vendors can set up those profiles for many different retailers.”

FSD: A MOST Logical Choice

A change in Walmart’s shipping requirements once almost knocked FSD out of the chili business. In 2004, the company’s contract manufacturer, Pinnacle Foods, was delivering the product to FSD’s warehouse in French Lick, Ind. From there, the wholesaler shipped it in 12-pack cases to its customers.

Then Walmart declared that instead of sending pallets loaded with cases to a large warehouse, FSD had to direct smaller shipments to numerous facilities called remix centers—delivering five cartons here, 15 cartons there.

“Complying would have required 14 different less-than-truckload (LTL) deliveries going in, which would have been almost impossible logistically,” says Graham. Walmart needed each shipment to arrive on a specific date, at a particular time, and LTL carriers can’t meet such precise windows.

Graham decided to work with a 3PL. Today, Pinnacle ships cases of Steak ‘n’ Shake chili to three warehouses operated by DSC Logistics. As part of its Multivendor Optimization Strategy service, DSC consolidates FSD’s shipments with product from other small and medium-sized vendors, transporting them in full truckloads to the correct Walmart facilities.

Consolidation helps small vendors in two ways. “First, it makes them more attractive to Walmart, which doesn’t want to handle a lot of small LTL shipments,” says Morgan at DSC. “Second, it saves money by getting shipments onto full truckloads.”

“Shipping a pallet of chili to Harrisonville, Ill., costs about $420,” says Graham. “Shipping to the same area from DSC costs around $105.”

Outsourcing is the key for many small companies trying to keep up with complex vendor requirements. For the do-it-yourselfers, teamwork, attention to detail, and a willingness to seek help from customers go a long way.

In the long run, compliance with vendor requirements becomes standard operating procedure and part of the cost of doing business. “Companies themselves, or their 3PLs, seem to be able to handle it quite well,” Muir notes.

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Working Together to Achieve Compliance

Some suppliers that sell to retailers believe vendor requirements manuals set up adversarial relationships. “They think the retailer is trying to squeeze them by imposing chargebacks, justly or not, with no opportunity to challenge those penalties,” says Kiel Harkness, retail segment strategist, UPS.

Other suppliers, however, work closely with their customers’ vendor compliance teams to ensure the relationship works for both parties. “They view a routing guide or compliance metrics as an opportunity to enhance their value and differentiate themselves from other suppliers,” Harkness says.

Some large companies offer suppliers plenty of assistance. “Big box retailers provide feedback to let suppliers know how well they are complying,” says Jim Muir, president of consulting firm Logistics SSI in Farmington Hills, Mich. That feedback provides opportunities to improve.

“Retailers are committed to working with their suppliers,” says Casey Chroust, executive vice president, retail operations, at the Retail Industry Leaders Association in Arlington, Va. Retailers want stable supply chains, so they’re committing to longer partnerships with suppliers. That gives retailers a stake in their suppliers’ success.

When vendors violate safety regulations or other legal mandates, retailers show zero tolerance. But if a violation concerns a less crucial element, such as a software configuration, most retailers will cut the supplier some slack and help with improvement.

Most large retailers operate vendor compliance programs, which provide vendors with valuable opportunities. For example, vendors gain a leg up by attending annual supplier meetings where, among other things, retailers share their plans for the future.

“Retailers are willing to share a wealth of information—both tactical and strategic—about where their corporate supply chains are headed,” Chroust says. “Suppliers need that knowledge to be successful.”