If you went to a restaurant with four friends and only two of you got your meals, would you consider that a success? What if your flight from New York to Los Angeles landed in Kansas? As a consumer, you wouldn’t visit that restaurant again and buy eight meals to compensate for the restaurant only delivering 50% of what you ordered. You wouldn’t pay for a flight to Japan to vacation in Hawaii. Paying for twice the product you actually need isn’t just bad business, it’s bad business that costs more than you can afford, not to mention creating a terrible experience for all parties involved. So why are major manufacturing companies doing this with their supply chains?
Direct procurement is perhaps the only area of a manufacturer’s operations where this backward principle applies, one where low or sub-standard on-time, in-full (OTIF) delivery rates are considered a success. Supply chains have grown so complacent that buyers know better than to expect to receive every part on time, in full and at the quality they need, and it’s led to rampant overbuying becoming the norm rather than the exception. Even in the best of times, over-ordering parts ties up cash in the form of sunk costs or excess safety stock. During periods of extraordinary disruption, like the one we’re in now, this practice is effectively running businesses into the ground.
Say all the parts do arrive on time, completely undamaged. Now you have potentially tens of thousands of dollars tied up in excess safety stock and inventory that might never see the light of day — especially if those parts become obsolete before they are used. You’re stuck with inventory that will eventually be written off.
How Did We Get Here?
The short answer is, “Because we’ve tolerated a lack of accountability at nearly every node in the supply chain,” from the buyer-supplier relationship to trust and transparency issues with data to outdated tools that prevent the supply chain from operating efficiently or with the right level of visibility and collaboration.
It’s easy, for instance, to blame a supplier for a lot of a supply chain’s misfortunes. However, if a manufacturer is experiencing low OTIF rates, excess safety stock and slow inventory velocity, or consistently pays massive expedite fees and customer penalties, the first stop on their road to redemption should be a mirror.
Supplier failure, after all, is a symptom, not the cause, of poor supply-chain performance. It can be traced back to the buyer side, sometimes resulting from human error but more often from the status quo — tracking POs with email, spreadsheets and sticky notes, for instance — and inaccurate, stagnant data sitting in enterprise resource planning (ERP) systems.
When companies realize their ERP data is outdated and reliant on manual updates, they approach tools into which they’ve invested significant time and money with skepticism. They either operate on gut instinct or are forced to blindly trust their ERP data because, regardless of the internal problems affecting their supply chain’s performance, they’re still on the hook to get product out the door. The reality is supply chains move faster than ever before and are riddled with surprises, disruption and constant change that many companies aren’t even aware of until it’s too late. By the time buyers have plugged in data points for raw materials, min-max safety stock, inventory and lead times, the data is already outdated because something somewhere in the supply chain — a purchase order change, an unanswered email, a supplier’s altered lead or response time — went unnoticed for too long.
Even before COVID, supply-chain disruption was so rampant that a “surprise” wasn’t even surprising. It’s expected, and it’s cultivated a mentality among manufacturers that revenue losses in the supply chain have simply become the cost of doing business. Supply-chain disruption commonly occurs during events — think natural disasters, geopolitical shifts and worldwide pandemics — that cause rapid spikes in demand and impact the supplier’s ability to keep up.
In "normal times," 40% of purchase order lines (PO lines) change, according to a report from The Hackett Group. That rate rose to a whopping 60% during the first part of last year due to COVID-19 disruption.
The buyer-supplier relationship is supposed to be a strategic partnership, but the “strategy” piece is squandered when both sides spend the majority of their time buried in outdated spreadsheets and lengthy email chains as they frantically attempt to adapt to the slightest change. The system breeds mistrust and a lack of accountability. No one wants to work this way and they shouldn’t have to, so why are so many enterprises still stuck in the past?
How to Fix the OTIF Problem
Attempting to compensate for poor supplier collaboration without addressing the root cause of the problem inevitably leads to low OTIF rates, or worse, deeming low OTIF rates a success. Manufacturers and buyers should adopt new best practices and tactics for evaluating supplier performance and managing individual supplier relationships and suppliers at scale to ultimately achieve improved, real OTIF rates:
Evaluate supplier performance in real time. Monthly or quarterly supplier assessments are an old school mentality and should be the first thing to go. Manufacturers and supply-chain decision makers should conduct more frequent, real-time, even predictive supplier assessments and use those touchpoints to discuss strategic improvements to improve future performance rather than diagnose past failures. Streamline these conversations with data-driven scorecards or slides that rate performance and on-time deliveries, and share them with your suppliers so they understand how you’re evaluating them and can meet your expectations and goals.
Reassess lead times. Your ERP should have accurate lead times for every part every second of every day. Is a supplier order consistently late? That may indicate lead times in your ERP are outdated. Talk to your supplier to double-check data, then make updates accordingly in your ERP so demand planning can do its job.
Expect PO acknowledgment — instead of hoping for it. How easily and quickly can you communicate with your suppliers? It’s fair to expect your suppliers to acknowledge PO changes 100% of the time without excessive lag time that inevitably leads to cascade failures and poor performance. After all, what good is sending an expedite request if it isn’t opened until a week later? Timely acknowledgment of POs is a telltale sign of good supplier communication and should be one of the most important metrics buyers use in assessing supplier relationships.
Establish a perfect order. Track the percentage of parts you receive on time, undamaged and at the quality you expect. Your supplier should deliver a perfect order 90% of the time or more to continue the relationship. Anything less puts revenue at risk and can result in stockouts, inflated costs and the steady erosion of customer trust.
Discover your hidden costs. Do you know the variance between what a supplier quoted you and what they charged you? Do you know how much you’re paying expedited logistics fees to compensate for late deliveries? Overbuying parts and late-delivery penalties are not the only costs resulting from supply-chain complacency. Streamlining the first mile also allows you to uncover other costly oversights, like overpaying on supplier invoices that don’t match your final purchase orders.
Improvements like these require a willingness to adapt to today’s modern, fast-paced supply chain. Introducing change and implementing new processes can be daunting, but it pays off in the long term. Remember that cross-country plane ticket? When it’s time to book your trip, will you call up a travel agency and pay unnecessary service fees? Or will you embrace modern travel tools that allow you to book online, ultimately saving yourself time and money, giving you peace of mind for the trip ahead?
Tom Kieley is co-founder and CEO of SourceDay, a provider of supply-chain performance software.
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