Magazine Article | May 1, 2005

In Search Of Supply Chain Conformity

Source: Innovative Retail Technologies

A focus on vendor compliance helped Gottschalks improve fill rates, maintain 99.5% shipment accuracy, and enjoy the benefits of cross docking.

Integrated Solutions For Retailers, May 2005

Fifteen-plus years ago, a handful of tier-one retailers led by Federated and May Department Stores spearheaded an initiative to establish a new set of standards with merchandise vendors. The retailers' goal was to improve the speed and accuracy of the supply chain. Lots of small to midsize retail supply chain people crossed their fingers and hoped it would work. Back then, the idea of a few big retailers banding together to force vendors into using standard shipping labels seemed a little ambitious; the thought of enforcing use of a standard garment hanger seemed very much so. But it worked, and shortly thereafter Marc Elmo, VP of distribution at 63-store, $661 million department store Gottschalks, adopted the new standards. In his 420,000-foot DC, employees had been toiling with garment shipments. They unpacked them, removed their tags, and took them off their hangers. The hangers and price tags were tossed in the dumpster. DC employees then applied proprietary tags and slipped the garments onto Gottschalks hangers before packing them back up and shipping them out to stores. The whole laborious process kept receivables in the DC for five to seven days. While midsize retailers plodded along in this fashion, Gottschalks and the tier-one players made headway with vendor compliance, eventually enabling their ulterior motive - cross docking.

Put simply, to cross dock merchandise at a DC is to pull it off an inbound truck; run a bar code-enabled, automated receivables process on it; and put it on a store-bound truck as quickly as possible. The advantages are obvious - a JIT (just-in-time) supply chain eliminates stored JIC (just-in-case) inventory and increases turn rates, which directly impacts sales. But cross docking cannot happen unless receivables are store-ready when they hit the DC. It cannot happen unless the garment hanger used at the manufacturing level is the same one that will see the sales rack. It cannot happen unless the shipping label applied at the vendor's facility is the same one that will be read at the retailer's DC and, ultimately, store. It cannot happen unless accurate merchandise is shipped on time. Without vendor compliance, cross docking simply cannot happen.

That said, today DC cross docking is the de facto standard for tier-one retailers and progressive small to midsize retailers like Gottschalks. Retailers have enabled it by taking control of their supply chains and getting serious about vendor compliance. "We now cross dock 85% of our merchandise because we've automated our vendor compliance initiative, which gives us confidence that we're getting the right product to the right store at the right time," Elmo says. In fact, over the past ten years, Gottschalks has required the industry standard use of electronic POs (purchase orders) and ASNs (advanced shipping notices). Cartons are received with complete UCC (Uniform Code Council)-compliant labels, and the merchandise therein is floor-ready and packed according to store. Garments are hung on VICS (Voluntary Interindustry Commerce Standards)-approved hangers and merchandise is ticketed with Gottschalks' price tags.

Vendor Noncompliance Can Hurt Retail Sales
If vendors didn't comply with these and many other supply chain requirements set forth by Gottschalks, the retailer's fast-paced cross-docking system could break down. The wrong merchandise might show up in stores, the right merchandise might show up late or not at all, or merchandise might not be correctly prepared for the sales floor, defeating the purpose of a JIT supply chain. That's why Gottschalks made compliance and expense offsets (chargebacks) a key element of its JIT replenishment model. When the receiving and distribution model at Gottschalks was manual, the retailer only issued expense offsets for about 10 common offenses, mostly dealing with inaccurate shipments uncovered by physical inspections. Elmo says he simply didn't have an automated process of identifying exceptions. "If we uncovered an inaccurate shipment, for example, we had to pull up the PO, research what the terms were, find out when we received it, and then act on it," he says. This, in an environment where employees were busy tearing down receivables and rebuilding outbound shipments.

Noncompliant shipments like this not only cause interruptions in the flow of merchandise through a retailer's DC, they cause fill rates to suffer. Fill rate is a measure of a vendor's ability to meet demand for an item. Prior to its compliance initiative, it wasn't uncommon for some Gottschalks' vendors to send incomplete shipments. Coming up short on forecast merchandise demand can result in serious stock positioning woes, which can negatively impact customer satisfaction.

Substitutions are another violation that can hurt retailers. Often attributed to a picking mistake at the manufacturing level, substitution is the term used when a retailer gets the correct quantity of merchandise but the wrong SKU. "Substitutions are a problem in this business, and we wanted an automated process to identify them and advise our vendors within days of receiving the merchandise," says Elmo. "This would give our vendors an opportunity to identify and correct the problem."

DC-Level Compliance Tool Enables Supply Chain Visibility
As a result of its early adoption of cross-docking and vendor accountability initiatives, Gottschalks saw improvements in its supply chain. But Elmo knew the more supply chain data Gottschalks could capture, the more the retailer could help its vendors stay accountable. That's when he found Compliance Networks' rCMS (Retail Compliance Management System). At the time, Gottschalks was knee-deep in a JDA merchandising systems upgrade, removing its mainframe in favor of a client-server computing model. The last thing Elmo's CFO wanted to hear was a brilliant plan to take on another expensive IT project. But what Elmo told his CFO was, rather, the last thing he expected to hear. Compliance Networks would install its servers and software technology at no charge and using fewer than 100 man-hours of Gottschalks' IT resources. In return, the vendor would expect only a percentage of the expense offset revenue it would help to automatically generate. Elmo, who admits that his department is often seen as a "necessary expense," didn't bother trying to compute the potential ROI on the project. "Some vendors had compliance issues, and we needed to get them detailed information in a timely manner to help them correct the problem. This was an opportunity to accomplish that with zero cash outlay," he says.

The installation, which was completed inside five months, comprises a dozen PCs in the DC and a handful of digital cameras used to record select violations. rCMS is tied via the retailer's LAN to its JDA merchandising and Equinox Global Systems DC management products. Merchandise needs are forecast and buying decisions made with the help of JDA's system, from which electronic POs are generated. The POs are simultaneously uploaded to rCMS and distributed to vendors. On the receiving end, as ASNs come in from vendors they're entered, also simultaneously, into the Equinox cross-docking system and rCMS. "When we receive merchandise at the DC, we validate the number of cartons received against the manufacturer's bill of lading, then we scan the UCC label," says Elmo. "If the label information is valid [matches the original PO and the ASN], we release the shipment for distribution. We can typically have merchandise on store-bound trucks within 10 minutes of receiving it from the carrier." Because rCMS is integrated with the retailer's merchandising and receiving systems, it has complete visibility of vendor noncompliance and can automatically generate expense offsets as noncompliance is discovered.

Collaboration Fosters Compliance
Today, Gottschalks requires an 80% fill rate for seasonal merchandise and 85% for replenishment goods. If those percentages aren't met, vendors are notified immediately and potentially incur expense offsets. The numbers speak for themselves. Gottschalks' fill rate has increased significantly since going with rCMS. Accuracy of purchase orders filled has improved as well. If a vendor's ASN shipment accuracy is below 99.5%, the retailer increases the frequency of the audits it performs on that vendor's shipments.

These audits are necessary because of a potential downside to cross docking - if there are inaccuracies within the cross-docked shipment, they might not be uncovered until the merchandise is received by the store. For this reason, Gottschalks focuses on noncompliant vendors by auditing their shipments. "Through the auditing process, we pick up information about a vendor's commitment to accuracy. What we discover in that audit area [a physical area of the DC designated for breaking down shipments and examining them] helps us determine how intensively to audit a vendor," says Elmo. "If we see a pattern, we increase the frequency of that vendor's audits and rCMS sends notification of the violations via e-mail to the appropriate vendor contacts." In the event a vendor continues to send noncompliant shipments, the retailer moves all of that vendor's shipments through its QA (quality assurance) area and audits each carton.

In its previous manual expense offset scenario, Gottschalks' vendors often received notification of violations weeks after the shipment arrived at Gottschalks' DC. The scenario was unfair to vendors, who, unaware of the problem, might have been distributing many more noncompliant shipments in the meantime. With rCMS, the vendor receives e-mail notification, often complete with digital photographs of the infraction, within days of sending the shipment.

With rCMS in place, the automatic identification of exceptions has increased flow through the DC because of better compliance. Gottschalks even uses the system to monitor shipping frequency, a cost that, given recent spikes in fuel costs, can quickly escalate. "We want vendors shipping only twice a week and not on consecutive days. Now we can monitor and enforce that, helping us save freight dollars," says Elmo. And the cross-docking operation enabled by tight control of shipments has reduced Gottschalks' dependence on expensive JIC inventory and DC manpower.

"If we wouldn't have begun cross docking, I believe I would have spent a great deal of money expanding this DC," says Elmo. "The cross-docking initiative and the automation of the compliance process has allowed us to triple the processing capabilities of our flow-through DC. Since our opening we've reduced delivery time to the stores significantly."

Marc Elmo jumped on supply chain standards quickly after they were proven by tier-one retailers like Federated and May Department Stores. Today, Gottschalks is recognized as a progressive midsized retailer, and Elmo is extolling the virtues of vendor compliance and cross docking working in tandem in his DC.