Perfection is in the Eye of the Beholder
If you look at the analytical dashboard of a logistics, procurement or supply chain manager you may find KPIs such as OTIF, fill rate, etc. Most of the time you will see the respective figures to be around 96-99%. This is commonly understood to be an outstanding operational performance when it comes to shipping OR receiving merchandise or raw materials. It is the to-be state in—and outbound supply chain operations strive towards.
Upon some further inspection, these figures may require some additional scrutiny. How relevant and good is a 99% fill rate really? Are the goods received not only on time, complete, damage free and are the bill of lading and invoice matching the actual purchase order price? Well, that is where things quickly fall apart.
A 96% on time, 96% complete, 96% damage free and 96% accurate invoice is actually only a 85% perfect order. Would you want to run your business close to a 80/20 rule when it comes to serving your customers and paying your suppliers?
Every so often, WERC undertakes studies into this matter and finds that distribution centers continuously miss the mark. The figures are more between 80-84% and one study by the Retail Compliance Council found inbound vendors order to retailers to be only at 23%. The best practice here was a mere 63%.
- Incorrect product or size shipped
- Incorrect delivery information
- Incorrect packaging or handling information
- Incorrect customs information
- Product discontinued
- Product not matching catalog description
- Customer unfamiliarity with product features (order error)
- Customer change-of-heart (wardrobing in retail or fraud)
The cost of getting it wrong are significant, especially with higher-priced items. They include:
- Labor and freight cost for backordered items
- Identifying and providing a replacement product
- Refunding purchase price
- Providing credit
- Labor cost for handling backordered invoice and customs handling
- Commercial penalties (typically higher around key retail shopping period like Black Friday, Valentine’s Day)
- Lost sales (delayed or voided revenue)
- Lost customer
- Container blowout to handle backorders
What is at stake here, you ask? Per AMR, a 3% increase in a perfect order index (POI) drives 1% in additional profit margin. Also, RoA and EPS too increases.
Recent customer engagements have shown us that distribution centers sit on $2-3 million of safety stock and 2-3 weeks longer cycle times to cushion this pattern. A recent healthcare provider example indicated that close to $25 million of excess and obsolete (E&O) stock accumulated in every department to the point of having 3-year expired supply items. Last year, our work at an automotive OEM, drove us to tackle their $2.8 million annual container blow out cost due to poor packaging information.
There is a data as well as a process component at play here. Our research has shown that better data management practices can improve order errors by up to 6%. This would mean 2% higher margins!
Here are some tangible areas and actions around data and data-driven processes you should look at:
- Vendor file
- Validation of financial and regulatory information (OFAC, D&B, etc.)
- Vendor hierarchies (legal, shipping, billing)
- Validation of place of manufacture, assembly, shipping and warehousing (supply risk)
- Vendor information uniqueness (one-time vendor avoidance)
- Up-to-date contact information
- Maximum delivery attempts per order/item/category policy
- Item file
- Clean & unique item profile (SKU, BOM, UOM, MOQ, HS code, GTIN, supercessions, etc.)
- Validated packaging instruction and dimensions
- Validated cost attributes
- Enriched item profile (attribution and graphics)
- Labeling changes (e.g. Made in America, HAZMAT)
- Discontinue/expiration flag and policy synchronization
- Location file
- Dock location, staffing, hours, signature rights
- “Bad merchandise” handling instructions
- Location management (facility/bin location/dimensions/cost center)
On all these it is key that not only the initial setup is 99.999% correct and appropriately communicated to relevant stakeholders and systems but that this is monitored and validated (automated if possible) on an ongoing basis. Consistent synchronization between WMS, ERP, SCM, MES and POS systems and integration of a variety of EDI feeds around order, catalog, firmographic and carrier shipment is a must.
Do you have some insight into your organization’s POI performance? How far away are you from this supply chain nirvana?