Optimizing Profits Through Vendor Performance Management

Optimizing Profits Through Vendor Performance Management Monitoring and analysis of vendor performance and reliability allows retailers to reduce stock levels, improve operational efficiencies, customer satisfaction and increase profitability. Sponsored by: An RIS White Paper

VENDOR PERFORMANCE MANAGEMENT (VPM; SOMETIMES KNOWN AS SUPPLIER relationship management ) is the foundation of collaborative planning, allowing retailers to strike better, smarter deals with vendors, as well as allowing those retailers to take steps to ensure in-stocks even during highly volatile seasonal and promotional activity. However, effectively managing and maintaining vendor services is a challenge that requires detailed, real-time information at the retailers fingertips. Technological tools are now available that deliver a single version of the truth that encompasses the entire enterprise customers, products, the supply chain, employees and finance. These technological tools put that detailed, real-time information in hand and enable retailers to continually assess vendor performance, spot poor performers and take corrective action, leading to reduced stock levels (and reduced stock interest expense), evaluate and determine process improvements, increased customer satisfaction and increased profitability. As Beth Enslow, vice president, enterprise research at the Aberdeen Group, writes in the report, Supplier Performance Management: What Leaders Do Differently - A Benchmark Report on How Companies Manage Supplier Performance and Supply Disruptions: Corporate success will increasingly be dictated by how well a company can control its supply base, create continuous performance improvement and identify and mitigate supply bottlenecks and liabilities. She also writes: Companies that adopt best-in-class supplier performance management practices are two to three times as likely to achieve supplier on-time delivery and first-time fill rates that are above the market average. COMPANIES THAT ADOPT BEST-IN-CLASS SUPPLIER PERFORMANCE MANAGEMENT PRACTICES ARE TWO TO THREE TIMES AS LIKELY TO ACHIEVE SUPPLIER ON-TIME DELIVERY AND FIRST-TIME FILL RATES THAT ARE ABOVE THE MARKET AVERAGE. Beth Enslow, vice president, enterprise research, Aberdeen Group. It should come as no surprise, then, that retailers are seeing the power of VPM tools and moving toward rapid implementation. The 15 th Annual Retail Technology Study, Retailing Shifts into High Gear, presented by RIS News and Gartner, reports that 38% of respondents will have updated VPM technology by the end of 2005. And by the end of 2006, an additional 22% will be updating. Retailers get upside revenue benefits as well as efficiencies with improved collaboration through suppliers, said Andrew White, research director for supply chain management, Gartner, in Retailing Shifts into High Gear. They end up introducing newer products ahead of competitors, gaining an opportunity for a private label, reductions in out-of-stocks and lower costs for distribution. In a world where profit margins are often measured in single digits, gaining a competitive advantage of that magnitude is akin to finding the pot of gold at the end of the rainbow. Unlike the mythological pot of riches, however, the gains delivered by VPM applications and suites is real and available right now. ASSESSING VENDOR PERFORMANCE Monitoring and assessing vendor performance requires a formal procedure, something many retailers currently lack. A software implementation featuring a process dashboard is recommended. A process dashboard ensures that key stages of vendor review are executed in a timely fashion so weaker vendors can be identified quickly and steps taken to improve performance or replacements sought. In addition, process dashboards enables monitoring of contract compliance and collaborative vendor relationships for improved analysis of these relationships. 2 www.businessobjects.com

RETAILERS MOVE TO DEPLOY VPM TOOLS UP-TO-DATE TECH IN PLACE SUPPLIER RELATIONSHIP MANAGEMENT 21% 17% 12% 10% STARTED BUT NOT FINISHED MAJOR TECH UPGRADE WILL START MAJOR TECH UPGRADE THIS YEAR WILL START MAJOR TECH UPGRADE WITHIN 2 YEARS (Source: 15th Annual Retail Technology Study, Retailing Shifts into High Gear, presented by RIS News and Gartner) By providing a customizable user interface, an application or suite featuring a process dashboard gives stakeholders the ability to measure both the performance of vendors and their own enterprises by displaying specific KPIs. The dashboard shows the status of business metrics using easy-to-understand interface conventions such as gauges. A broad view of the enterprise is made readily available, including vendor performance metrics. Functionality and power can be increased, however, by implementing an application or suite that integrates process dashboards with VPM scorecarding capability. In the Benchmark: Scorecarding Suppliers, the Aberdeen Group writes, almost all best-in-class firms scorecard. The best of the best are now experimenting with predictive analytics to spot inflection point and KPI correlations that identify capacity issues, lead time variability, financial viability or quality issues long before they would show up on a quarterly scorecard. They are evolving the scorecard into a forward-looking risk management instrument. Scorecards can be established to set goals and track performance on virtually any metric, as well as to set benchmarks identifying high- and low-performing vendors. Process dashboards then alert stakeholders if performance goals are not achieved, enabling retailers to intervene and take corrective action(s). There are additional benefits to be gained from the implementation of technological tools that incorporate customizable scorecards and process dashboards, such as Business Objects Vendor Performance Management suite. Most notable, these tools provide for greatly increased collaboration between retailers and vendors. It s often said that VPM isn t possible without collaboration, and vice-versa. VPM puts up-to-the-minute information at the fingertips of both retailers and vendors. Retailers can see clearly how well a vendor is performing and alert an underperforming vendor, sharing the data and working together to rectify the situation. Conversely, a vendor showing performance improvement can be consulted with to determine what strategies are leading to this better showing, and steps can be taken to continue the trend. Of course, to be able to share such information, the retailer must be confident that his or her data is not only accurate, but timely. Without VPM in place, producing such accurate and timely information is vastly more difficult, greatly hindering the possibility of collaborate retailer-vendor relationships. With VPM in place, performance can be tracked, analyzed and shared with confidence. REDUCING STOCK LEVELS A key benefit delivered by VPM software s collaborative empowerment is the ability to analyze vendor responsiveness and use that analysis to better manage lead times and delivery reliability, reducing inventory levels and stock interest cost. Utilizing process dashboards for ease of use, effective VPM tools enable www.businessobjects.com 3

A sample scorecard illustrating the ability to measure performance v. goals. Through goal setting and scorecards, retailers can track vendor performance, collaborate within the enterprise and follow recommended actions to improve performance. (Source: Business Objects) retailers to focus on fulfillment cycles and establish benchmarks to monitor vendor performance. Vendor performance can then be measured against that same vendor s past performance, or against comparable vendors responsiveness levels. This information allows retailers to negotiate for improved vendor cycle times or seek new vendors with improved times, reducing stock levels and cost. Too often, vendor shipments arrive short, with substitutions or are late, resulting in backordering of products without confirmation. However, by implementing VPM applications featuring process dashboards and scorecards, retailers are able to collaborate with vendors, even giving vendors access to planned orders so vendor managers will be able to plan inventory availability to more closely match demand. This, in turn, allows retailers to reduce stock levels, as timely and complete shipments become the norm. In the Aberdeen Group Benchmark: The Quiet Revolution In Supplier Management A Benchmark Study on How Companies Are Communicating with and Monitoring Their Suppliers, Beth Enslow, Aberdeen Group vice president, enterprise management, writes: Companies can take specific actions, such as using event monitoring technology, that will double or triple their chance of achieving 40% or greater performance improvements. It s only logical. If VPM technology using real-time scorecards and process dashboards to track, analyze and evaluate suppliers ( event monitoring technology ) is implemented and properly exploited, vendor performance will improve, resulting in more consistent deliveries. Those consistent, complete deliveries will, in turn, result in reduced out-of-stocks while simultaneously allowing retailers to reduce inventory levels because they will be able to rely on timely, complete replenishment. This explains the Aberdeen Group s finding: Two-thirds of companies (surveyed) say they are looking to supplier management improvements specifically as a way to gain advantages. (Beth Enslow, The Quiet Revolution In Supplier Management.) 4 www.businessobjects.com

By assessing vendor performance and improving reliability, retailers are able to realize a reduction in outof-stock situations. VPM software highlights underperforming vendors, so retailers can focus on those vendors, identify the problem areas, and work collaboratively with vendors to rectify the situation, or seek out betterperforming vendors. IMPROVING CUSTOMER SATISFACTION Reducing out-of-stock situations has one concrete and overriding benefit: happier customers. More importantly, happy, satisfied customers who complete their purchases. In their landmark 2002 study, Retail Outof-Stocks: A Worldwide Examination of Extent, Causes and Consumer Responses, Thomas W. Gruen, Ph.D. (University of Colorado), Dr Daniel S. Corsten (Institute of Technology Management, University of St. Gallen) Scorecards and process dashboards show clearly KPIs that enable continuous vendor performance assessment, including the duration of specific vendors order fulfillment cycles. By putting this information at management s fingertips, VPM technology gives retailers the ability to reduce inventory and associated costs as well as reducing out-of-stocks at the store level. (Source: Business Objects) and Sundar Bharadwaj, Ph.D. (Goizueta Business School, Emory University), write: Our consumer data of more than 71,000 consumers surveyed show an increasing willingness of consumers when confronted with an out-of-stock situation to seek those items at an alternative outlet. These consumer studies show depending on the product category that when confronted with an out-of-stock situation, 21 to 43 percent of consumers will make that purchase at another store, while another 7 to 25 percent will not buy the item at all. The authors continue: The consumer studies show that retailers are likely to lose almost one-half of the intended purchases when a consumer confronts an out-of-stock. This loss does not include the impact of substituting, which generally tends toward a cheaper substitute. (Emphasis in the original.) If having products the right products in stock when the customer enters the store to make his or her purchase is a major key to that customer s satisfaction, then it follows that deploying VPM technology that can help ensure in-stock situations is also a key to customer satisfaction. Specialty retailers are acutely aware of this. Charlotte Russe Holding, Inc., which operates the Charlotte Russe and Rampage clothing chains, is a prime example of the urgency specialty retailers feel when it comes to customer satisfaction. The Charlotte Russe stores target a wide customer age range, with a core emphasis on the fashion and lifestyle needs of young women in the teens and twenties; Rampage stores are more cutting edge, targeting, the company says, young women who want runway-inspired fashion. In www.businessobjects.com 5

(VPM) IS A BUSINESS CRITICAL AREA TO UNDERSTAND HOW DIFFERENT VENDOR PRODUCTS PERFORM. Edward Wong, senior vice president, supply chain and systems, Charlotte Russe Holdings, Inc. both instances, the customer base is fickle and highly dynamic. So is the product mix in the stores. Charlotte Russe stores boast, Because of the rapid inventory turnover, (the customer) finds something new every time she enters our doors. It s the same story at Rampage, where merchants leverage rapid inventory turnover to deliver constantly changing offerings to this fashionconscious consumer. Charlotte Russe and Rampage accomplish this through the use of VPM technology. It s a business critical area to understand how different vendor products perform, explains Edward Wong, Charlotte Russe Holdings, Inc., senior vice president, supply chain and systems. Wong says Charlotte Russe Holdings has successfully met that challenge. We ve been able to analyze performance down to style level, particularly for select store tests, and buy back into good performers for broader store rollout. By exploiting the power of VPM technology, Charlotte Russe and Rampage stores have been able to successfully improve the performance of their respective vendors, resulting in improved in-stock situations and, logically, more satisfied customers. So satisfied, in fact, that Charlotte Russe had grown to 294 stores as of September 2004, and plans to expand to a full 500 stores nationwide. And Rampage has plans to expand from 66 stores (as of September 2004) to 200 stores. Simply put, VPM is a major contributor to the success of Charlotte Russe, not least because of its attendant benefit of customer satisfaction. As Edward Wong says, Given our business model as a fashion retailer with predominantly domestic vendors, the ability to quickly read product sales performance becomes paramount to ensure buying back into selling trends. WORLDWIDE CONSUMER RESPONSES TO OOS (Average across eight categories) Do Not Purchase Item 9% Substitute Different Brand 26% Delay Purchase 15% Substitute Same Brand 19% Buy Item at Another Store 31% (Source: Retail Out-of-Stocks: A Worldwide Examination of Extent, Causes and Consumer Responses) 6 www.businessobjects.com

BETTERING THE BOTTOM LINE It s a retail truism that reducing out-of-stock situations leads directly to increased sales, making that arguably the key benefit of VPM software. However, by reducing stock levels, as well as product returns and damages, VPM software pays hidden dividends that drive profitability and speed ROI. In Measuring Supply Chain Performance, Benita M. Beamon, of the University of Washington, provides an example list of vendor performance measurements, giving an idea of the scope of benefits delivered by VPM technology such as Business Objects Vendor Performance Management: Fill Rate: Proportion of orders filled immediately. Percent On-Time Deliveries: Percent of orders delivered on or before due date. Back Order/Stockout: Item, order or product availability performance. Shipping Errors: Number of incorrect shipments made. Customer Complaints. Reduce stock levels Improve customer satisfaction and reduce stock-outs Vendor Retailer Monitor vendor review process (Source: Business Objects) By providing real-time visibility, VPM technology allows retailers to monitor and improve each of those KPIs across the vendor range. Underperforming vendors are identified promptly, so measures can be taken to resolve underlying issues, or, in more dramatic instances, replacement vendors can be sought out. It s important to note that there are several approaches to VPM technology currently available. Philip Howard, Bloor Research research director, technology, posits three distinct approaches: tailor-made, packaged suite and framework-based. In Vendor Performance Management Strategies, Howard explains the benefits of the framework-based approach thusly, you can take the sort of approach that Business Objects adopts, providing less specific, framework-based analytic capabilities that provides the basics and tools for you to build your own solutions. Retailers, regardless of niche, will be well served by investing in and implementing VPM technology. Best in class retailers have already done so, and those who continue to delay are at risk of conceding competitive advantage to others in their markets. www.businessobjects.com 7

ABOUT BUSINESS OBJECTS Business Objects is the world s leading business intelligence (BI) software company. With more than 30,000 customers worldwide, including over 80 percent of the Fortune 500, Business Objects helps organizations gain better insight into their business, improve decision-making and optimize enterprise performance. The company s business intelligence platform, BusinessObjects XI, offers the BI industry s most advanced and complete platform for reporting, query and analysis, performance management and data integration. BusinessObjects XI includes Crystal Reports, the industry standard for enterprise reporting. Business Objects has built the industry s strongest and most diverse partner community, and also offers consulting and education services to help customers effectively deploy their business intelligence projects. Business Objects has dual headquarters in San Jose, Calif., and Paris, France. The company s stock is traded on both the Nasdaq (BOBJ) and Euronext Paris (ISIN: FR0004026250 - BOB) stock exchanges. More information about Business Objects can be found at www.businessobjects.com.