For retailers in today’s competitive marketplace is all about making “right” turns; having the right product in the right location at the right time for the right price. To capture market-share, retailers invest heavily on replenishment and allocation technologies, planning organizations, business intelligence, promotional vehicles, compelling store fronts, fulfillment and logistics facilities – all to manage inventory and convert goods to revenue. Most of this infrastructure and the related environment are variables carefully and closely controlled by the retailer. However, the one key component in retailers’ ability to deliver goods to market that it can’t completely control is what it relies on most… its vendors. Coming out of a recession, many retailers are looking for ways to re-engineer their supply-chain, create new channels of distribution, and rely more and more on the services of their vendors. For many retailers, these services are based on many relationships, often in the thousands. Managing these relationships requires metrics – key performance indicators – that provide some ability to recapture scale and monitor/manage performance. Again, to be competitive today, your relationship with your vendor is not simply from whom you receive goods, but a partner that have services, assets, and abilities to help you get ahead. If you feel your not getting enough from your vendor, then you have to change the way you measure their performance. These metrics, more commonly referred to as “Vendor Scorecards” have been used in a number of industries for decades – manufacturing and consumer products, government agencies, financial services. In retail however, it’s a newer concept and not widely used as it is in other industries. So, DiCentral in conjuction with VCF thought it would be a great idea to convas a number of its partner retail companies to see just how and why vendor scorecarding is used, what works, what are common constructs employed in scorecarding, and where opportunities may exist.
In late 2011, DiCentral in conjunction with VCF conducted a survey of retailers to better understand how vendor scorecards are used today. It sampled many of today’s leading retailers, 2/3rds of which represent public retail entities with 90% of those public companies enjoying revenue in excess of $1B. Collectively, the participants of the study represent nearly $600B in revenue resulting from cross-channel sales. Of the participants of the study, 62% compile and present their vendors with scorecard results.
As cited in the survey, retailers have a number of reasons for score-carding suppliers across operational, tactical, and strategic concerns. In general terms, retailers cited two key reasons for using scorecards. One stems from the need to compare a vendor performance against pre-determined goals. The other is driven from the need to compare vendors against one another. Survey participants overwhelmingly indicated the number one reason for producing a vendor scorecard is to partner with the vendor in order to grow the business. To develop a strong partnership encourages investment (while threat of loss or charge-backs create an uncertain business climate, one the vendor is less likely to invest in). A close second, retailers cited vendor comparison as a key driver for producing scorecards. Although not shared with suppliers, retailers use vendor rankings for financial and operational assessment, often for the purpose of narrowing assortments or eliminating vendors. Third, retailers cited using scorecards to benchmark a baseline set of supply-chain requirements and drive vendors to minimally meet those requirements, reinforced with charge-backs if necessary. Although not cited by a majority of retailers, the fourth reason identified in the survey was to provide a tool for buyer negotiation. A distant fifth reason retailers used a vendor scorecard is to foster promotional activities to either clear inventory or drive cooperative marketing initiatives.
There are no standards for scorecards; every retailer has it’s own. There is no standard to formatting, delivery, or data collected. However, there is commonality identified in the survey – ranked in this diagram clockwise based on frequency of response cited. Most notably in the survey results, we found delivery metrics identified as the key data collected and reported in scorecards. These include: Fill-rate and on-time delivery Replenishment back-orders ASN Accuracy Short-shipments and substitutions A few Quality metrics: Packaging, hander errors or challenges in lableing Catalog discrepancy Financial impacts: Stock-outs Sales and Margin.
Why Should Vendors comply with Retailers Business and EDI Requirements The retail industry is quickly moving towards issuing chargebacks and keeping track of vendor performance. The reason is that retailers no longer have the luxury to receive merchandise manually and will not accept noncompliance as a norm for doing business. Thus it is in the vendor’s best interest to meet the Retailers Business and EDI requirements. How will Supplier Compliance help the Vendor? The majority of vendors that are not EDI compliant are asking (What is in it for me? ) Why should vendors incur the cost of EDI? And try to be compliant? The reasons to comply range from the obvious with hidden benefits. Let’s explore the vendors what is in it for me ?
Although the respondents provided a wide range of results they experienced when launching a vendor scorecard, over 85% indicated the scorecard produced positive results. Over half of the retailers cited tangible benefits such as on-time deliveries, complete and accurate shipments, reduced lead-times, reduction in inventory investment, reduction in order latencies and in-transit time, improvement in shelf-space utilization, reduced ticketing and packaging discrepancies, and improved in-stock positions resulting in fewer lost sales. Other retailers reported less tangible benefits such as improved buyer awareness, vendor training opportunities, and an overall general improvement in vendor relations. Surprisingly, some retailers found that the scorecard produced more benefit to their own internal processes, citing improvements in data integrity and quality, automation of data capture, and operational controls in procurement and receipt functions. A minority of participants, 12%, found no benefit, referencing the aforementioned integrity and technical challenges when they attempted to produce a scorecard.
So, what scores are generated from the supplier scorecard? We have reviewed a number of categories subject to scorecarding, with various components. Each component provides a key performance indicator for a specific measurement – whether metrics for delivery, quality, or others. A number of these metrics may have contractual implications. For example, a retailer may cancel or charge back a supplier if goods are received after the delivery window. The retailer may require the supplier to delivery at a 95% fill-rate or they are not to deliver the goods at all. However, from the survey a number of participants in the survey indicated that they compile composite scores and provide those scores to both suppliers and internal constituents alike. Composite scores are not standard – they may be numeric or have some other literal valuation. For example, some retailers may set a threshold of a 70, meaning a composite score of 70 is passing, although there may be individual areas for improvement, while a score below 70 is failing. On occasion, there may be some form of contractual obligation or penalty to the supplier for a failing grade, but for most there are not. This doesn’t mean that there aren’t repercussions from a poor score – it will almost definitely impact the relationship. For many that develop composite scores, the sum of the parts are generated from weighted criteria. For example, some retailers may place an emphasis on On-Time delivery, meaning that suppliers that delivery within the delivery window gets high marks. Delivery before the window may get a demotion of 10 pts, delivery after the window may get a demotion of 20 pts – with this category being weighted higher missing that window costs. Other retailers may place a value on fill-rate – meaning 100% order fulfillment is a high score, anything below a 92% fill-rate gets a demotion and may impact the overall composite score. All this said, it is important for retailers to make clear what criteria may be more important that others – and for the suppliers to understand this.
Develop Metrics to manage vendor performance It is common knowledge that you cannot manage what you do not measure, thus the first step is to identify areas that are causing you pain. The key areas that we will address are Finance (invoices) and Logistics/Distribution (Asn) the reason for making them a priority when developing metrics is that these areas will quickly give you a return on your investment. The metrics should reflect your organization’s business and Edi requirements; I will provide you with a metric’s guide for the Asn, these are to be used as a starting point to help you develop your own metrics.
Your organization will save time and money by first sending proactive alerts to vendors of data that is not correct and secondly you have a way of measuring errors to provide vendors documentation when chargebacks occur. The metrics will be the backbone of your compliance program and should be developed only in areas that impact your business. Keep chargeback program simple and consistent
This question wasn’t explicitly in the DiCentral survey. However, we can make a few inferences by connected a number of the responses we were provided. First, there is a very close correlation between the level of B2B integration and the tangible benefits of score-carding. Those that showed particularly strong B2B integration in the survey also stated higher tangible benefit. Conversely, as would be expected, there is a close correlation between retailers that have weak B2B integration and those reporting failed initiatives or no scorecard. Those responding with higher returns on their scorecard initiatives indicated that their audience participation was broad, including most if not all internal and external participants. Those responding with smaller returns identified their audience was strictly targeted to their buyers. Those with failed scorecard initiatives explicitly indicated that a key challenge was data integrity, poor process controls, or lack of a timely delivery. Another anecdotal relationship we found is in the data was between the size of the retailer and the tangible benefits they reported. The larger retailers that participated in the study reported significantly larger gains in operating performance, citing 30% to 50% improvement in a number of metrics. The smaller the retail participant, the less tangible the benefit reported. We can only surmise the cause and effect of this relationship, but suspect it’s a result of an economy of scale (carry a big stick) or a function of resource and prioritization. However, again these are inferences we’ve drawn from the survey results and should be taken as such.
So, what can we glean from the survey results that point to opportunities for improvement? The most obvious opportunity found is the delivery mechanism for communicating scorecard results. Of the participants that indicated that they have a formalized scorecard process and communicate results with suppliers, more than half use static reports that are emailed to suppliers. This implies that no real-time analytics or vendor portals are leveraged. 22% of the participants indicated that scorecards are available on-line. Another opportunity is found in the intended audience of the vendor scorecard. Overwhelmingly, retailers identified the intended recipient as the buyer (VP, GMM, DMM). Fewer than 10% of the respondents identified the vendor. Yet fewer identified accounting/finance or the merchandise planning organization, although planning may be implied as part of the “buyer” organization. Yet another opportunity lies in the breadth of data types used to support vendor scorecards. The vast majority of participants only leverage delivery and receipt metrics as the basis for evaluation. The survey responses clearly indicate that operational execution and bottom line performance are the primary focus areas. However, there are many other opportunities for score-carding to eliminate risk, improve top-line performance, and drive customer affinity. More focus on: Relationship Metrics: Strategic alignment, level of mutual commitment, joint problem solving and conflict management, frequency and quality of communication. Strategic Value: Contribution to product innovation, cooperation in entering new markets, commitment to process improvement, and contribution to brand equity. Financial Value: Cost avoidance, price stability, return on invested capital, incremental revenue and margin.
So, in summary here again are the findings from the DiCentral and VCF survey: We discovered why retailers compile vendor scorecards: 2 overarching reasons: a) compare metrics to retailers goals, b) compare suppliers against one another Specific reasons include: 1. drive vendor performance and growth 2. vendor rationalization and ranking 3. drive supply-chain compliance – reinforced with charge-backs 4. buyer negotiation 5. promotional activities We found what key data is usually compiled in scorecards: * ranges from the quantitative to the qualitative. Quantitative metrics such as delivery, quality more prevalent than sales and margin metrics. We’ve summarized what retailers found as key benefits of scorecard initiatives: 1. double digit gains in metric improvement around deliveries and receipts. 2. improved awareness and communication between parties. 3. improvement in We’ve surmized what factors make a scorecard initiative successful: We’ve received some insight on how vendors are scored and what makes a pass/fail grade: Finally, we reviewed opportunities for scorecard improvements:
Again, on behalf of DiCentral and VCF, we thank you for your time. Please feel free to contact us. Now, we’re happy to open the discussion up to any questions you may have.
Vcf and DiCentral scorecard presentation webinar 3 14-2012
VENDOR SCORECARDINGDiCentral/VCF Research Results Mary Kleespies Director of Supply-Chain Consulting Paul Wagner Retail CIO & Management Consultant
VENDOR SCORECARDINGDiCentral/VCF Research Results •Participants of the study represent approximately $600B in revenue. •A mix of both public and private companies, but majority of companies participating are public. •Almost all retailers participating enjoy revenue in excess of $1B.
Key Reasons WHY retailers use Vendor Scorecards
What is Collected in Vendor Scorecards Higher frequency Higher frequency of responses of responses Lower frequency Lower frequency of responses of responses
How do Scorecards Benefit Vendors • Obvious Reasons for Compliance • Avoid Chargebacks • Develop a good partnership with Retailer • Cut cost of manually receiving orders and keying in paper invoices • Expedite the flow of merchandise through supply chain thus generating more business • Track documents and have complete visibility of merchandise that is shipped to Retailer • Get invoices paid faster
How do Scorecards Benefit Vendors • Hidden Reasons for Compliance • Great Compliance grants you the privilege of getting your shipments cross docked • Cut risk of getting a charge back due to items that was substituted • Move you to the top of the buyers list • Opportunity to negotiate better terms with the buyer • Supplier Compliance Managers will be more willing to work with you when charge backs do occur
Key reasons Retailers produce Vendor Scorecards (Ranked by recipient response ) • Proactive tool to drive vendor performance and improve growth. • Vendor rationalization and vendor ranking. • Drive supply-chain compliance through use of charge-backs. • Buyer negotiation / impact on purchases. • Promotional activities and supported funding.
Key Benefits Realized When Deploying (In order of frequency of response) •Improvement in receipt metrics – often citing double-digit gains •Improved awareness and communication in both merchant and vendor communities •Improvement in retailers’ internal processes and data integrity •Reduction of inventory investment •Improved financial performance (sales, margin)
Metrics for ASN • ASN store number is a mismatch to PO store number • Items on the ASN were not on the original PO • Item quantities on the ASN do not match what the received on carton • Items on ASN are not received in carton • ASN is received past the cancel date on the purchase order • Carton listed ASN not received
Scorecard Results-Pass Fail •To the supplier, pass or fail is determined by whether or not its business grows with the retailer, it recognizes the revenue expected, and conducts business without penalty. •Individual metrics can have contractual implications – often around delivery and quality. •Composite scores don’t often have contractual implications unless it is identified in the purchase or vendor agreement. However, composite scores can significantly influence the relationship.
Scorecard Results-Pass Fail • Composite scores may have numerical grading with some definition around acceptable and unacceptable scores. • Other composite scores may simply be defined in terms of Excellent, Good, Fair, Needs Improvement, Unacceptable. • Composite scores often have weight to individual components.
How Build a Scorecard that will reflect your compliance Goals • Educate vendors on what you will require of them before initiating a compliance program • Clearly state that your goal is to receive the correct merchandise on time and not to make money off of charge backs • Educate your Distribution / Warehouse personnel emphasize that you are working to get vendors to ship correctly and need their help to accomplish this goal • Provide a concise list of penalties for non-compliances
Metrics for NON EDI Business Requirements • The shipment arrived with product that was not ordered • Items were sent without hang tags • Items to be shipped on hanger were sent without hangers • Cartons received with hangers on the bottom and items on top • Shipment did not have certificate of origin • Items were not packed according to business requirements
What Makes Scorecard Initiative Successful Have a strong integration with your suppliers – Have a strong integration with your suppliers – B2B //EDI. B2B EDI. Ensure a strong, cross-functional team is Ensure a strong, cross-functional team is properly engaged. . properly engaged Test your scorecard and ensure data integrity Test your scorecard and ensure data integrity before rolling out. before rolling out. Be focused on the specific outcomes you want, Be focused on the specific outcomes you want, resource the initiative appropriately. resource the initiative appropriately.