Supply Chain Digest editor Dan Gilmore recently spent some time with Greg Holder, CEO of Compliance Networks, on issues related to vendor compliance and ecommerce. Highlight are below.
Gilmore: One of the key issues here I think is the vendor drop shipping that has become so prominent. What are the vendor compliance issues here?
Holder: There is really two things. First, if you think about the typical retailer you would normally shop at, many are pursuing what they call the "endless aisle," where they are offering things not carried in their stores or not even carried in their ecommerce fulfillment centers.
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Most retailers are managed by merchants, and many of them are leery of the chargeback process.
Greg Holder
CEO
Compliance Networks
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The first thing a retailer is concerned about whendrop shipping from a vendor is the impact on their brand. An example of that is if something goes wrong, then it's likely it’s the retailer the consumer is going to be upset with, not the vendor.
The next thing from a retailer's perspective will be concerns about the timing of the shipment. With drop shipping the retailers is now blind, so they are losing control of that shipment and they need to be able to manage any exceptions that occur.
So when there is an ecommerce order that needs to be drop shipped, then an EDI 850 purchase order is sent to the vendor, awaiting a response with an EDI 855 transaction, which is the purchase order acknowledgement, generally in two to four hours.
Beyond that, within a day they want that product shipped, and that involves another EDI transaction, which is an 856 or what would typically be known as an ASN, but with some details that might be different than for a standard advanced ship notice sent to a distribution center, in this case asking for a tracking ID. You can think of it as like a FedEx or UPS tracking number.
And then finally there is the invoice, the retailer generally wants that within a day. So the cycle is a whole lot more compressed, and in any of those events they want to know about exceptions and if customer service needs to get involved.
So where we would normally see an inbound vendor compliance program at the retail DC, if it is being shipped by a supplier, the real controls are all those EDI transactions.
Gilmore: This is very interesting to me. I think you still might want to track something akin to fill rates here, maybe based on PO acceptance or when the order actually shipped or something like that. That's very different than measuring fill rate based on a full truck coming into a DC. I assume even though this is being handled by the vendor, you can still track and measure all this electronically?
Holder: Absolutely. So if you look at the 855 purchase order, that is at the item level, so if someone orders five and the vendor acknowledges they can only ship four, that's the first trigger as an exception and means they have to be on the phone on communicate with the customer about another unit or item to replace that.
Of course, we would expect the 855 and the ASN and the invoice all to match, but of course we know that isn't always the case, and we need to track that.
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Gilmore: OK, second topic: retailers have traditionally managed their own fulfillment, but with ecommerce it seems a growing number are using third-parties to manage this. How does vendor compliance work when a retailer uses a 3PL?
 Holder: I am going to disagree with you a bit by saying I am seeing a trend of retailers moving away from third parties and managing their own efulfillment.
But beyond that, the process is pretty much the same. Even if the 3PL has its own WMS or other distribution systems, we make our compliance system available to the 3PLs over the Cloud, including tablets for shipment audits, and we tie into the EDI and other transactions in the same way.
Gilmore: Finally, it's challenging times for many retailers today, in part due to ecommerce, with much pressure on the bottom line. It also seems to me by having a robust vendor compliance program you can help that financial scenario in part by making sure you recover costs from vendor performance failures.
Holder: In general, you are correct, but most retailers are managed by merchants, and many of them are leery of the chargeback process. So we hear the same objections that we heard 20 years ago about the challenges of issuing chargebacks to offset a retailer's costs, and they will often say things like "We really need certain vendors, so we don't want to create issues by generating chargebacks."
But you still need to hold those vendors accountable for delivering what they agreed to in the purchase order. There are costs that a retailer incurs when something is not right about a shipment. Those costs need to be recovered, in a fair and objective way, and as you said that's more important than ever today given the financial environment. Vendor compliance systems enable that process for retailers.
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