Prime Vendor Program Logistics Explained

Who is a prime vendor? It is a single large supplier [vendor] who procures goods and services from different sources for redistribution to a customer within a geographical area. Prime vendors usually purchase and store items required by the customer from a cluster of pre-approved suppliers, referred to as ‘preferred suppliers’.

A customer places purchase orders with the prime vendor as and when required, subject to contract clauses. The prime vendor is responsible for fulfilling all the orders thus placed following the terms and conditions of the contract between the two parties.

How does the prime vendor program help the customer? In a nutshell, it helps customers in the following ways:

• The customer holds minimum inventory in such cases. The prime vendor delivers directly to the customer’s preferred locations and hence, it does not have to worry about redistribution systems.
• The high volume of such contracts often requires the prime vendor to purchase in bulk from their suppliers. Bulk purchasing fetches them better rates, terms, and conditions which are often passed on to the customer.
• The prime vendor’s expertise in running logistics operations can be leveraged to the maximum in such contracts.
• The customer deals with a single point of contact at the prime vendor for all its stock requirements.
• Not having to worry about non-core activities and the associated costs involved helps the customer focus on its core functions.

A prime vendor contract can be compared to a normal contract which is the agreement between two parties for the exchange of goods and related services at specified prices, following specific terms and conditions. However, in this case, the customer takes his requirements of goods or services only from the appointed prime vendor. There may be separate prime vendors for food items, beverages, medicines, etc.

Most such contracts are high volume and therefore of high value. Contracts are awarded based on bids received from different qualified prime vendors. The process of bid selection and final approval is usually long-drawn and such contracts are generally for durations exceeding three years.

It may be extended until the next firm award is in place either with the same prime vendor or another successful bidder.

Prime vendors are usually large, well-established businesses that specialize in wholesale, distribution, and retail of major food and beverage brands. Most of them have warehouses in strategic locations or close to customer bases. They may also outsource their warehousing and services requirements from other qualified parties.

What is a Prime Vendor Model?

An organization enters into a firm contract with a specified prime vendor for the purchase of a specific line of goods or services, underlining the agreed rates, terms, and conditions. Based on carefully prepared forecasts, the prime vendor procures inventory from select, pre-approved suppliers and stores the required inventory in their warehouses. It is then supplied to the customer as and when required based on their orders.

Inventory could be from international or local sources. Generally, such supplier sources are vetted by the customer before the prime vendor enters into an agreement for purchase.

Prime Vendor Contracts

Prime vendor contracts are most common in defence sectors whose requirement for inventory is large but intake often in smaller portions over frequent intervals to different strategic locations. Customer locations could be war zones, areas affected by natural disasters, or other contingencies.

For ease of delivery, most prime vendors have their warehousing and transport hubs set up strategically near such zones while considering the safety of their staff and infrastructure.

A prime vendor contract lists the terms, conditions, and obligations of both parties. Generally, they are elaborate and cover all aspects of the business. A simple yet detailed contract helps both parties understand each other better and mitigate risks.

Upon the award of a contract, a specific number of days is given to the new prime vendor to start operations, stock up goods, and begin deliveries. This period is often referred to as ‘ramp-up days’.

A certain number of days usually referred to as ‘ramp-down days’ is given to the unsuccessful, incumbent vendor if any, to wind down their operations and dispose of remaining stocks as per contract. This period usually ranges between thirty to forty-five days.

Ramp-up and ramp-down days are mentioned in the contract.

Prime vendors are required to maintain buffer stocks to prevent out-of-stock situations [stockouts]. It could range from fifteen to sixty days or more depending on the product, location, and the end customer’s requirements.

Dry items are those with long shelf lives that can be stored under ambient conditions while perishables are those with limited shelf-life that require temperature-controlled storage. Besides these two, fresh items are those like milk and vegetables. Fresh items are usually sourced locally by the prime vendor.

The customer may have predetermined specifications regarding the pallet sizes to be used for transporting the goods and other packaging requirements.

In situations of stock-out, the prime vendor may offer substitutions to the customer. Substitute items are similar to the originally ordered items. However, it could be a different brand or have some minor specification changes.

Emergency orders

The majority of prime vendor contracts have a clause stipulating the number of emergency orders that are allowed over a period. Emergency orders are the customer’s unplanned orders placed over and above their regular orders.

Prime Vendor Costing

Costing is the process of working out the unit cost of a product or service. In prime vendor contracts, how is the cost to the customer [pricing] calculated? The two most common methods of pricing are as follows:

Percentage Pricing

A certain agreed percentage is added to the cost of the product, in this system of costing. This percentage may vary between product types. For example; meat products, dairy, and dry items such as grains, pulses, etc. may have different percentages.

Markup pricing

In this method, a flat fee known as a markup will be charged on the cost of the item.

In some cases, the existing market price may be charged to the customer. This is for seasonal products or those with widely fluctuating costs.

While costing, all factors such as inflation, cost of using alternate modes of transport, taking alternate routes, etc. should be considered.

Prime Vendor Forecasts

Prime vendor forecasts are similar to normal commercial forecasts in that they are calculated using the historic intake data of the customer [purchases], the buffer stock requirement, etc. It is used by the prime vendor to arrive at the appropriate purchase order quantities. Purchase orders are placed with the preferred suppliers at predetermined intervals.

Several types of forecasting techniques are available. Complex algorithms that use Artificial Intelligence [AI] that take into account seasonal or wildly fluctuating demands are often used in these forecasting tools.

Key Performance Indicators [KPI]

Key performance indicators are quantifiable measures used to track the performance and progress of an organization over a period. They are normally judged based on set benchmarks and accepted industry standards. Some of the key KPIs are as follows:

Fill rate %

Fill rate is a measure of actual delivered quantities to the customer against their original order quantity. Example: 100 cartons of apples ordered. 98 cartons supplied. The fill rate in this case is 98%.

Substitution rate %

When a customer-ordered product is temporarily out of stock, a substitute product may be given to the customer. Such products offered as substitutions are agreed upon between the prime vendor and customer initially. Substitution rate % shows successful substitutions provided to the customer.

Lead Times days

Lead time is the time taken from when an order is placed, to the time it is delivered to the customer’s premises. The actual lead time is compared against an ideal, calculated lead time to arrive at the variance percentage.

Picking Accuracy %

Picking accuracy shows the percentage of accurately picked lines. The benchmark set to compare this is usually 99 – 99.9%.

Besides these main KPIs, others are recorded and monitored to understand and improve the performance of a prime vendor.

Some of them are:

• Storage utilization %
• Delivery truck cube fill %
• Delivery truck trips per day
• Cases handled per head
• Inventory shrinkage %
• Logistics cost
• Margins
• Receivable Days

Benefits of a Prime Vendor Contract

Prime vendor contracts usually benefit both parties, that is, the customer as well as the prime vendor.

Best Pricing from Prime Vendor

Being the sole vendor to the customer, prime vendor purchases from their suppliers are usually in bulk quantities. Hence, prime vendors are in a position where they can negotiate better prices with their suppliers. Savings thus made are usually passed on to the customer.

Single Point of Contact

Prime vendors have individual account managers to manage their prime clients. The system of a single-point contact results in ease of communication, instead of the customer having to deal with several individuals or departments.

Orders are generally placed online by the customer following a fixed item list, at a fixed price.

Resolving Disputes

Prime vendor contracts usually cover crucial, strategic projects – military or humanitarian. Both parties to the contract, therefore, strive to resolve disputes if any, quickly and amicably so that services are least affected.

Prime Vendor Logistics and Product Expertise

Prime vendors with their large infrastructure and experience in handling specific types of products can offer better products and services to their customers. It might not often be possible to get this level of service from smaller vendors.

Best Practices

Prime vendors follow best practices and professional work ethics in their everyday operations. They aim to build and maintain robust, sustainable working relationships with their customers.

However, one commonly cited disadvantage of the prime vendor program is that after the awarding of a contract, service levels may go down due to a lack of competition.

The strength of successful prime vendors is in drawing upon their core strengths, as well as gathering outside resources and capabilities when required, to provide well-oiled supply chain services to their prime customers.

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