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Supplier performance costing you money

Is supplier performance really important?

To a great extent, improving customer fill rates while reducing the working capital tied up in inventory is achieved by managing the risk in the supply chain. In this blog post, our focus is on “supply risk”.

If suppliers always delivered on time in full, supplier performance would be a non-issue and supply chains would be lean.

A lot of focus is put on the importance of classification, forecasting, allocating the correct supplier, applying the correct Policy parameters and placing the best possible purchase orders on suppliers.  However, if your suppliers deliver randomly, then your chances of meeting your customer’s fill rate expectations may be severely compromised.

You may be thinking, “Supplier performance is a characteristic over which I have little or even no control. Surely, addressing the above factors is sufficient to calculate replenishment orders that will maintain my inventory balance?”

Whether that is an accurate perception or not, the fact is that no matter how much attention you place on optimizing the order calculation, you are totally dependent upon the your suppliers delivering on time and in full every time.

However, the order is simply the plan. The expression “life is what happens when we are making plans” is very relevant in this case.

You either “let life happen” or take a pro-active stance. Consider the following options:

  • Use “fixed levels ” to calculate the order quantity and hope for the best
  • Order more than is actually required, just in case. Buyers who have been hurt by suppliers letting them down often apply this safety mechanism to avoid the pain of the experience reoccurring. May I ask – do you really know what your buyers are doing? This behaviour results in higher than required working capital tied up in inventory without necessarily solving the issue and may be costing you more than you think
  • Evaluate each supplier’s performance and factor this into the calculation of safety stock.  Calculate dynamic “smart levels” with this safety stock.  In this manner every “supplier-product’s” unique supply risk profile is accommodated in the order calculation.  It does not end with placing the order, the focus must now shift to “making the order decision right”.

Expediting function

If you do not have an expediter in your business, consider writing a simple procedure to define the required actions and implement it. Communicate with your suppliers, request confirmation they will deliver the full quantity ordered on time. Continue to verify deliveries will be on time. Measure their performance and provide feedback to them. As their performance improves, their risk reduces and the safety stock required, reduces.

Start with your biggest, most troublesome supplier and work from there to the smaller ones.

Supplier performance measurement

When it comes to risk, we often have little factual information to work with.  Even when we are aware a supplier is “risky”, we may only have a very subjective perspective and are influenced by opinions and emotional factors. Our decisions are often biased on the basis of hoped for results with little fact to back it up.

The starting point for gathering the facts is the lead time itself. It must be a true indicator of the lead time to receive the next order. In many environments, lead times are either not held in the ERP system or if they are, little attention is given to ensuring they are accurate.

To evaluate supplier performance, a system that stores for every item delivered, the purchase order detail such as location, product code, supplier code, order number, order date, expected delivery date and the quantity ordered, the actual delivery date and quantity received into store must be held. Additional data such as revisions to the expected delivery date are often useful too. With data, the actual lead time and fill rate can be calculated and the analysis done. Providing supply risk inputs to the safety stock calculation are also required. Metrics and dashboards to translate the data into information that users can easily understand and apply for decision-making is essential.

These are also required to provide useful feedback to suppliers. Unless this is done to improve supplier performance, little will be gained. This creates a win-win for all parties.

The ability to derive value from the analysis is very dependent upon the quality of the data.

Data quality

  • If the lead time is calculated in the ERP system, determine how it is calculated. Is it simply the “last lead time”? This approach tends to produce volatile lead times that are not always useful for planning the next delivery
  • Where a supplier’s lead time is for the delivery to a consolidation warehouse, the supplier’s lead time is only a part of the total planning lead time. This is a more complex situation to manage.  Ideally, the process must be documented and clear to everyone involved so that the correct planning lead time is used
  • Because call-off orders make it very complex or even impossible to evaluate both supplier performance and delivery performance, consider placing individual orders every replenishment cycle
  • Cancelled and emergency order actual lead times must be excluded from the supplier analysis
  • Revising the expected delivery date whenever new information comes to hand, eliminates the opportunity to measure supplier performance against the original expected delivery date. It is important to retain the original expected delivery date in your system for supplier performance measurement
  • Systems that close off an order line when an incomplete delivery is made, and create a new line for the balance of the order quantity, make it very complex to measure supply performance
  • The data of orders placed on alternate suppliers must be excluded when analyzing the performance of the preferred supplier

In summary

  • Reducing supply risk lowers working capital invested in inventory
  • Historic purchase order data is usually very noisy. Ensure the data used in the analysis is of high quality and appropriate to the calculation
  • The purchase order states your requirements to the supplier. Make sure the supplier is committed to meeting your requirements
  • The lead time used for planning replenishment must be an accurate prediction for the delivery of the next order
  • Use a safety stock calculation that considers the supplier’s ability to deliver on time and in full
  • Ordering levels must dynamically adjust to reflect changes in lead time and supply risk
  • The most important factor in measuring supplier performance and managing supply risk is a capable Inventory Management System

Other thoughts

  • Every order on a new supplier is a step into the unknown. Develop long term mutually beneficial supplier relationships
  • Consider implementing supply agreements with your largest suppliers that include a performance clause aimed at reducing lead times and improving delivery performance. Better pricing should also result from the agreement.

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