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Vendor Compliance: Meaning, Requirements, Checklist, Importance, Example

By Annapoorna

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Updated on: Apr 3rd, 2024

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7 min read

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Our relationship with the vendors has a big role in defining our business efficiency.

Vendor compliance checks can help us in maintaining this relationship.

In this article, we will discuss vendor compliance and how it can help us improve our business's efficiency and operations.

What is vendor compliance?

To make sure that the products or services meet the quality, every business sets some standards. The vendors must follow these standards for delivering their products or services. This is vendor compliance, as it’s referred to globally.

In India, vendors must also follow GST tax rules. This involves timely reporting of invoices in GSTR-1 or through the Invoice Furnishing Facility (IFF), crucial for the smooth functioning of the Input Tax Credit (ITC) mechanism.

Following these rules makes business transactions clear and responsible. Including GST rules with other quality checks helps businesses work smoothly and follow the law, making a better market for everyone in India.

Need for vendor compliance

Several key factors highlight the importance of ensuring vendors meet certain standards:

  • Avoiding Operational Issues: Vendor compliance helps ensure that the materials enterprises buy are of good quality. This means we have fewer problems while selling them.
  • Cost Efficiency: When things go wrong, it can cost the enterprise a lot of money. By ensuring our vendors do things right, we can make fewer mistakes and save money.
  • Legal Compliance: Legal compliance prevents fines and legal issues. Non-compliance by vendors with GST rules can disrupt tax credit claims (ITC), causing financial losses. Vendors must follow these rules to avoid such problems.

Vendor compliance checklist / What’s in a vendor compliance policy?

A vendor compliance policy outlines rules for suppliers, focusing on important areas like product quality, delivery timelines, service standards, packaging, and handling returns. 

Your company's vendor compliance policy should detail:

  • Timely filing of GST returns by vendors
  • Reporting of invoices in GSTR-1 for timely and accurate Input Tax Credit (ITC) claims.
  • Backorders: Management and reduction strategies.
  • Product Condition Upon Delivery: Expectations for the state of goods when received.
  • Product Quality: Adherence to specified quality standards.
  • Delivery Dates: Timelines for product delivery.
  • Service Standards: Levels of service required.
  • Product Packaging and Labeling: Guidelines for packaging and label making.
  • Paperwork Requirements: Necessary documentation.
  • Customer Returns/Credits: Handling returns and issuing credits.

These points ensure clarity and efficiency, focusing on reducing delays and costs and improving overall supply chain operations.

Vendor compliance best practices

Vendor compliance best practices include:

  • Talk Clearly: Make sure vendors understand what you expect from them.
  • Check Work: Regularly check if vendors are following the rules.
  • Work Together: Help vendors meet your standards by guiding them.
  • Be Fair: Set rules that are fair and possible to follow.
  • Update Often: Keep your rules up to date with new changes or improvements.

These simple steps help make sure everyone is on the same page, and things run smoothly.

Benefits of a vendor compliance programme

  • Reduces Mistakes: By ensuring vendors understand and follow your requirements, you'll see fewer errors in deliveries and orders, leading to smoother operations.
  • Saves Money: Minimising errors and streamlining processes cuts unnecessary costs, from wasted materials to expedited shipping fees.
  • Improves Relationships: Clear expectations and communication foster a positive working relationship with vendors, making problem-solving and collaboration easier.
  • Enhances Quality: Compliance standards maintain product/service quality, meeting customer expectations consistently.
  • Speeds Up Processes: A well-managed supply chain reduces delays, enhancing efficiency and enabling quicker response to market demands.

Making sure suppliers follow your company's rules is really important. It helps things run smoother, saves money, and keeps the quality of products high. When you know what you expect from suppliers and work closely with them, it helps everything go more smoothly. 

This means fewer mistakes and happier customers. Plus, it helps the business grow in a sustainable way by making the supply chain more reliable.

Also Read
All About Automation of Vendor Management in Accounts Payable

Frequently Asked Questions

What is vendor compliance, and why is it important?

The supplier is the vendor, and every business person has some rules and standards for their products. The vendors must comply with these rules, and this is known as vendor compliance. Additionally, in India, compliance with Goods and Services Tax (GST) laws is also a crucial part of vendor compliance. This includes timely filing of returns and accurate reporting of invoices for proper tax credit claims (ITC).

It's important because it stops mistakes, saves money, and keeps customers happy, helping the business grow, it also ensures that the business operates within legal requirements, avoiding penalties and ensuring smooth tax processes.

How can a business implement a vendor compliance program?

A business can start by defining clear standards and expectations, communicating these to vendors, and regularly monitoring compliance. It may also involve training vendors and setting up a system for feedback and continuous improvement.

What are common challenges in vendor compliance management?

The main issues include:

  • Clear Communication: Making sure both sides understand what's expected.
  • Monitoring Compliance: Keeping track of all suppliers to ensure they follow the rules.
  • Handling Changes: Adapting to new rules or business needs while maintaining good supplier relationships.
About the Author

I preach the words, “Learning never exhausts the mind.” An aspiring CA and a passionate content writer having 4+ years of hands-on experience in deciphering jargon in Indian GST, Income Tax, off late also into the much larger Indian finance ecosystem, I love curating content in various forms to the interest of tax professionals, and enterprises, both big and small. While not writing, you can catch me singing Shāstriya Sangeetha and tuning my violin ;). Read more

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