Retailers are missing millions of dollars in margin by failing to fully capture all vendor non-compliance fees.

Imagine if you set a curfew for your children, and they consistently violated it, but you did nothing to enforce it.  Doesn’t make much sense, does it?  You would demand adherence to the rules.  But many retailers are doing exactly this – setting policies for vendors to follow then failing to enforce them.

Are you one of them?

Take three examples of retailer business practices and the common compliance (and non-compliance) policies they put in place:

• Early/Late Shipments: Most retailers assert the right to reject and return the merchandise (either fully or partially) or levy a penalty when merchandise is shipped or received outside certain date windows. Non-compliance charges typically include a flat fee or percentage of the invoice cost.
• Partial Shipments/Backorders:  Generally, retailers require that POs be shipped complete.  When they aren’t it is common to chargeback the full freight of the 2nd shipment, and, at times, accompanied by another flat administrative fee ($25-$100).
• ASN Transmission Violations: The goal of ASNs (advance shipping notices) is to provide key information to the destination’s receiving operations well in advance of delivery.  Most often, retailers impose non-compliance ASNs as a flat fee based on a per PO/DC/ASN, or carton basis.

Sounds punitive to vendors, but it’s not.

The purpose of all of these offsets, chargebacks or penalties is to recoup some unanticipated costs incurred by the retailer for a vendor’s non-compliance.  For example, late shipments can result in out-of-stocks, inventory backup, and cash flow disruptions for retailers.  Non-compliance ASNs directly increase receiving and warehousing costs.

In fact, retailers often have “compliance groups” that monitor compliance policies and initiate chargebacks.  But, these groups often don’t capture all the compliance policies they decide to enforce.

How much?

Our experience auditing behind a limited number of these compliance groups is, that over a two-year period, we identified over $20 million in missed non-compliance fees.  It ranged from $1,000 to $300,000 in missed fees for every $1 billion in retailer sales.  Lack of full vendor compliance has negative supply chain, financial, and customer consequences impact for retailers. Not only are the purchase-to-pay processes disrupted and margins impacted, but:

• Retailers who insist on vendor compliance may have a cost advantage over those who do not
• If not enforced, the entire cost of the transgression is borne by the retailer, magnifying the cost imbalance
• In the battle for customers, retailers who win are generally those who are able to get the right goods to the right place at the right time and cost

So, how can retailers recoup unanticipated costs?

Experience shows that using recovery auditing – whether performed by internal or external post-audit teams – is an underused tool for management to help make sure these millions of dollars in unanticipated costs are recouped.

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