Explaining Prime Vendor Program Logistics
Who are Prime vendors? They are single, large suppliers that source goods and services from a variety of sources and redistribute them to customers within a specific geographic area. Prime vendor typically source and stock the products needed by customers from a group of pre-approved suppliers (called “preferred suppliers”).
Customers place purchase orders with Prime vendors as needed, according to the terms of the contract. The Prime vendor is responsible for fulfilling all orders according to the terms and conditions of the contract between the two parties.
How does the Prime Vendor Program help customers?
In short, it helps customers in the following ways:
In this scenario, customers maintain minimal inventory. The Prime vendor ships goods directly to the customer’s preferred location, eliminating the need to worry about redistribution systems.
These contracts are high-volume and typically require Prime vendor to purchase in bulk from their suppliers. Bulk purchasing provides them with more favorable pricing, terms, and conditions, which they often pass on to customers.
These contracts maximize the Prime vendor’s expertise in managing logistics operations.
Customers have a single point of contact with the Prime vendor for all their inventory needs.
Without having to worry about non-core activities and their associated costs, customers can focus on their core business. A prime vendor contract can be compared to a conventional contract, which is an agreement between two parties to exchange related goods and services at a specified price under specific terms and conditions. However, with a prime vendor contract, the customer only obtains the required goods or services from a designated prime vendor. Industries such as food, beverages, and pharmaceuticals may have multiple prime vendors.
These contracts are often large in scale and, therefore, high in value. Contracts are awarded based on bids from multiple qualified prime vendors. The bid screening and final approval process is typically lengthy, and the contract period often exceeds three years.
Contracts can be extended until the contract is awarded to the same prime vendor or another successful bidder.
Prime suppliers are typically large, established companies specializing in the wholesale, distribution, and retail of major food and beverage brands. They often have warehouses in strategic locations or close to their customer base. They may also outsource their warehousing and service needs to other qualified suppliers.
What is the prime supplier model?
An organization enters into a fixed contract with a specific prime supplier to purchase specific goods or services at an agreed price and under agreed terms and conditions. Based on carefully prepared forecasts, the prime supplier purchases inventory from pre-approved suppliers and stores the required inventory in its warehouse. It is then delivered to customers on demand based on customer orders.
Inventory can be sourced internationally or domestically. Typically, customers will vet these suppliers before signing a purchasing agreement with a prime supplier.
Prime supplier contracts are most common in the defense industry, where inventory is most needed, typically in small, regular batches to various strategic locations. Customer locations may be war zones, areas affected by natural disasters, or other emergencies.
To facilitate delivery, most prime suppliers establish strategic warehousing and transportation centers near these locations, taking into account the safety of their employees and infrastructure.
A prime supplier contract outlines the terms, conditions, and obligations of both parties. These terms are often very detailed and cover every aspect of the business. A simple, detailed contract helps both parties better understand each other and mitigate risk.
After a contract is awarded, a new prime supplier is given a certain number of days to begin operations, stockpile goods, and begin deliveries. This period is often referred to as the “start-up period.”
Existing, unsuccessful suppliers, if any, are given a certain number of days, often referred to as the “winddown period,” to wind down operations and dispose of any remaining inventory under the contract. This period is typically 30 to 45 days.
The drawdown period and dates are clearly specified in the contract.
Large retailers are required to maintain buffer inventory to prevent stockouts. This buffer inventory typically lasts from 15 to 60 days, or even longer, depending on the product, location, and end-customer demand.
Dry goods are commodities with a long shelf life that can be stored at room temperature.
Dry goods are commodities with a long shelf life and can be stored in temperate climates, while perishable goods are commodities with a limited shelf life and require temperature-controlled storage. In addition to these two categories, fresh goods also include milk and vegetables. Fresh goods are typically sourced from local key suppliers.
Customers may have predetermined specifications for pallet size and other packaging requirements for shipping goods.
If a stockout occurs, the key supplier may offer a substitute product. The substitute product is similar to the originally ordered product but may be a different brand or have slightly different specifications.
Rush Orders
Most key supplier contracts include a clause stipulating the number of rush orders permitted within a certain period. A rush order is an unplanned customer order that exceeds normal customer demand.
Key Supplier Costing
Cost accounting is the process of calculating the unit cost of a product or service. How is customer cost (pricing) calculated in a key supplier contract? The two most common pricing methods are:
Relative pricing
In this pricing system, an agreed-upon percentage is added to the product cost. This percentage can vary depending on the product type. For example, the percentages for meat, dairy products, and dry goods such as grains and legumes may differ. Margin Pricing
In this method, a fixed fee, known as a margin, is deducted from the product cost.
In some cases, customers may pay the current market price. This applies to seasonal products or products with significant price fluctuations.
When determining costs, all factors must be considered, such as inflation, the cost of using alternative shipping methods, alternative routes, etc.
Primary Supplier Forecasts
Primary supplier forecasts are similar to regular business forecasts in that they are calculated based on historical customer consumption data (purchase volumes), safety stock requirements, and other factors. Primary suppliers use this data to determine appropriate purchase order quantities. Purchase orders are sent to preferred suppliers at predetermined intervals.
There are various types of forecasting technologies available. These tools often use complex AI-based algorithms to account for seasonal or highly volatile demand.
Key Performance Indicators
Key Performance Indicators (KPIs) are quantitative metrics used to track an organization’s performance and progress over time. They are typically evaluated against specific criteria and established industry standards. Some KPIs include:
Order Fill Rate (%)
Order fill rate refers to the ratio of the number of items actually delivered to the customer to the number originally ordered. For example, if 100 boxes of apples were ordered and 98 boxes were delivered, the order fill rate in this example is 98%.
Substitution Rate (%)
When a customer’s ordered product is temporarily out of stock, a substitute product may be provided. These substitute products are initially agreed upon between the primary supplier and the customer. The substitution rate (%) reflects the number of substitutes successfully provided to the customer.
Lead Time (Days)
Lead time refers to the time it takes from the time an order is placed until the product arrives at the customer’s location. Actual delivery time is compared to the calculated ideal delivery time to determine the variance rate.
Pick Accuracy (%)
Pick accuracy indicates the percentage of delivery lines that are accurately picked. A typical comparison standard is 99%.
In addition to these key performance indicators (KPIs), other metrics are recorded and monitored to understand and improve the performance of key suppliers.
Some of these metrics include:
- Warehouse Utilization Rate (%)
- Delivery Truck Box Fill Rate (%)
- Delivery Truck Trips Per Day (%)
- Pieces Handled Per Person (%)
- Inventory Shrinkage Rate (%)
- Logistics Cost (%)
- Profit Margin (%)
- Days to Receive (%)
Advantages of Prime Supplier Contracts
Prime supplier contracts are generally beneficial to both the client and the prime supplier.
Best Pricing from Prime Suppliers
As the client’s sole supplier, the prime supplier typically purchases in bulk from its suppliers. As a result, the prime supplier can negotiate better pricing with its suppliers. These cost savings are typically passed on to the client.
Single Point of Contact
Prime suppliers assign dedicated account managers to manage their key accounts. This single point of contact system facilitates communication, eliminating the need for the client to interact with multiple personnel or departments.
Clients typically place orders online using a fixed list of products at a fixed price.
Dispute Resolution
Contracts with key suppliers often cover projects of significant and strategic importance, whether military or humanitarian. Therefore, both parties strive to resolve any disputes quickly and amicably to minimize service disruptions.
Key Supplier Logistics and Product Expertise
Leveraging their extensive infrastructure and expertise in handling specific products, key suppliers can provide customers with superior products and services. Smaller suppliers are often unable to offer this level of service.
Best Practices
Key suppliers apply best practices and professional business ethics in their daily operations. Their goal is to establish and maintain strong, sustainable working relationships with their customers.
However, a common drawback of key supplier projects is that service levels can decline after the contract is awarded due to a lack of competition.
Successful key suppliers leverage their core strengths and, when necessary, integrate external resources and capabilities to provide comprehensive supply chain services to their key customers.
