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2015

In our earlier article, we talked about understanding and leveraging various dates available in the customer order management side of your supply chain. If these are not properly understood and used, then priorities are difficult to understand (or even, discover) and the “every order is a priority” chaos may rule the day.

 

Furthermore, we discussed how having accurate date information regarding supply chain commitments on the outbound side (e.g., customer requested date, your promised date, and the necessary scheduled shipping date) also allows your firm to construct and use meaningful KPIs (key performance indicators) regarding performance, as well as your improvement over time.

 

This time we will discuss how disciplined use of dates on the inbound side of your supply chain can be valuable in your management and improvement efforts, as well.

 

Requested versus promised

Most purchase order management applications found in ERP systems facilitate your company’s ability to capture vendor performance metrics in a variety of ways. However, for most of these metrics, it all begins with assuring that accurate data is a part of the original purchase order at the time it is issued to your supplier.PO Dates.jpg

 

NOTE: We have taken the accompanying figure from Sage 500 ERP, but most purchase order management systems within the ERP context offer something similar.

 

Unfortunately, when I am introduced to many clients that are seeking to improve, I discover that most of their buyers pay no attention to these dates at the time of purchase order creation. By “no attention,” I mean to say, they simply take whatever dates default into such data fields and take no action to correct or adjust them in a way that would make these date data accurate and meaningful.

 

All too frequently, purchase orders are routinely released to suppliers with no commitment from the supplier at all regarding a “promised” delivery date.

 

Without capturing your own firm’s actual “requested” date—the date you are asking the vendor to deliver the goods to your location—and, if different, the vendor’s counter-offer as to the date the vendor expects actually to be able to deliver the goods to your location, these dates are meaningless. And, if these dates are meaningless, then so is any metric your firm might wish to employ.

 

It might be very helpful to know, for example, that for the same SKU:

  • Vendor A can and does meet our “requested” date 89 percent of the time
  • Vendor B can and does meet our “requested” date only 41 percent of the time
  • Vendor C always promises to meet our “requested” date, but actually delivers seven to ten days late 100 percent of the time

Proactively managing your inbound supply chain

You do not want your supply chain management and execution systems to overload your buyers and managers with too much data. Instead, one excellent approach is to take the total lead-time (i.e., the purchase order release date to the promised date) and divide it into thirds. Then, take the final third of the lead-time and subdivide it into three equal parts. These parts will be designated as the “green zone”, the “yellow zone” and the “red zone.”

LeadTime Buffers and Alerts.jpg

 

During the first two-thirds (the “white zone,” if you want to call it that) of the total lead-time, these purchased items really don’t need to be on the radar of your supply chain management team. However, once a PO line enters the green zone, it should appear in a visual tracking system of some kind.

 

While in the “green zone,” typically no action need be taken. However, when an PO line enters the “yellow zone,” someone on the team should take note and, perhaps, confirm with the vendor that the order is still on-track to meet their “promised” date.

 

As the order enters the red zone, a supply chain manager should ascertain the impact this order might have on end-products, customers, manufacturing schedules, and so forth. This will help the supply chain management team determine what actions should be taken to expedite the inbound order, reschedule manufacturing steps that might be affected, or notify customers of potential delays. We emphasize that this should be a collaborative decision-making and action-taking process that involves folks from across the organization that may be involved in or affected by resulting decisions and actions.

 

By the way, this concept was adapted from Ptak, Carol A., Chad Smith, and Joseph Orlicky. Orlicky's Material Requirements Planning. Third ed. New York: McGraw-Hill.

 

Real data for performance metrics and your POOGI

With real and realistic dates in your purchase order history for Requested dates and Promised dates, you are now prepared to see how your enterprise is performing and improving. You will be much better situated to understand and measure your performance and improvement over time for

  • Being able to rely on “promise dates” made by your suppliers
  • Knowing which suppliers are most likely able to actually deliver specific products within a specified lead-time if a purchase order is released today
  • Improve your expediting effectiveness, when expediting becomes necessary

 

With meaningless dates in your purchase order management system, however, there is no way to understand your vendors’ performance or what needs to improve. Start by gathering meaningful dates by which to compare your vendors’ actual performance.

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We would like to hear from you. Please leave your comments below, or feel free to contact us directly. Thank you.

I have worked with a significant number of clients over the last year or two that are laboring under the generally false assumption that each customer is the same as every other customer and each order is the same as every other order.

 

This is almost never the case.

 

While certainly every customer is important in a general sense, and every order is significant, there can be meaningful differences between customers—especially classes or groups of customers—and this should typically result in some customer orders being handled differently from other customer orders.

 

Customer Tolerance

In today’s economy, it seems that most of my clients have jumped to the conclusion that, in order to stay competitive, they must ship every product on every order “tomorrow,” or—at least—“as soon as possible.”

 

When I have asked the management teams as these clients’ offices: “Do you know the deliver tolerance levels of the various market segments you serve?” I am usually met with blank stares.

 

These clients do not know their customers’ tolerances for product delivery because they have never asked.

 

As a result, they cannot possibly know whether they are meeting or exceeding their customers’ needs and “tolerances.”

 

Worse! By not knowing their customers’ tolerance for product deliveries, they are forcing themselves into the situation where every order must be a “priority.” Moreover, when every order is a priority, there is no priority at all. Many times, there remains only a general chaos and frantic efforts to make sense out of nonsense.

 

Simply ask

Many order management applications found in ERP systems facilitate your company’s ability to come to terms with your customers’ delivery tolerances. Additionally, when leveraged, these capabilities can help you better understand how to meet your customers’ actual requirements while setting clear priorities within your own organization and supply chain.

SO Dates.jpg

We have taken the accompanying figure from Sage 500 ERP, but most order management systems within the ERP context offer something similar.

 

Sadly, the state of the data in the screen-shot here is the way I find at the vast majority of my clients when I first meet them and get them started on a process of ongoing improvement (POOGI). Here we see four dates:

  1. Order date – the date the order is taken from the customer
  2. Requested date – the date the customer would like to have the product (by line item) delivered
  3. Scheduled ship date – the date the order needs to ship in order to meet the “Promised date” (but, it cannot be earlier than “today,” since the order cannot be shipped any earlier than today)
  4. Promised date – the date we promised to have the product in the customer’s hands (by line item)

 

Of course, the order date is fixed by events. Nothing can be done to change that.

 

However, I tell my clients, “If you want to begin to understand your customers’ tolerances for various products or product lines, you simply need to ask.” Instead of assuming an ASAP scenario, take a moment to ask your customers, at the time they are placing their orders, “When would you like to have this product—or, these products—delivered?”

 

The answer to that simple question should go into the “Requested date.”

 

Requested versus Promised dates

Now, there may be times that the customer requests delivery on a specific date and you know that you simply cannot meet that requested date. That is where the Promised date comes into play.

 

Your customer may want 500 units of item X1027 delivered by Friday, 3 April. However, having checked, your customer service person might politely reply, “I’m sorry. We cannot deliver 500 of the X1027 by April 3. However, we can have them in your hands by April 8. Is that okay?”

 

If the customer agrees that April 8 is an acceptable date for delivery and want to continue with the order for the 500 units of X1027, then the Requested date becomes 4/3/XX, and the Promised date becomes 4/8/XX.

 

If this is done consistently, patterns will begin to emerge almost without fail. You will discover that some customers—or, some types of customers—may have one tolerance, while other customers have a different tolerance. These might even be further subdivided by product families. In the end, you will likely end up with something like this:

Customer Group

Sales Prod Line A

Sales Prod Line B

All Other Products

Wholesalers

7 days

4 days

10 days

Distributors

5 days

5 days

7 days

Retailers

5 days

3 days

5 days

 

Your customer service personnel should become very familiar with your newly discovered “customer tolerance” market segmentation by customer type (and product line, if required). As much as possible, new customers should be “shepherded” into the appropriate group for consistency and to properly set expectation.

 

Real data for performance metrics and your POOGI

With real and realistic dates in your order history for Requested dates, Promised dates and Scheduled Ship dates, you are then prepared to see how your enterprise is performing. You will be much better situated to understand and measure your performance and improvement over time for

  • Being able to “promise” to the customers’ “requested” date
  • Being able to meet your “promised” dates
  • Being able to ship on-time according to your “scheduled ship” dates

 

With meaningless dates in your order management system, however, there is no way to understand your performance or what needs to improve. Start by gathering meaningful dates by which to compare your actual performance.

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We would like to hear from you. Please leave your comments below, or feel free to contact us directly. Thank you.

In the first part of this series, we used the “Financial Cause & Effect Diagram” (see figure) to begin to try to unravel some of the cause-and-effect relationships that lead, ultimately, to a low (or, lower) ROA (return on assets) or ROI (return on investment). FIN Cause-and-Effect.jpg

 

One thing about this diagram: while it is a true representation of reality (in a generic sense), it is difficult to read and it does not make it easy to see where the core problems really lie. So, allow us to introduce a revised way of portraying these same cause-and-effect relationships. We call this the Current Reality Tree (CRT) and it comes from the Theory of Constraints Thinking Processes (PDF) tool set.

 

The clear advantage of laying out our cause-and-effect in the CRT format is that we can easily begin reading from the bottom to the top using if-then statements. The entities are numbered, too, for easy cross-referencing and to facilitate discussions within an organization.

 

Stimulating new thinking and innovation

 

One might start with Entity 3 and read: IF (3) we do not manage our inventory well, THEN (10) we have too many stock-outs AND (2) our inventories are too high AND (11) we have poor inventory replenishment and / or buying practices.

 

Here we have great example of how the Thinking Process tools to cause people to really thinking deeply about what is causing their enterprise to fall short in terms of making more money. Someone in the organization might argue along this line:

“Wait a minute. I think this is backwards. I think we should reverse the order of 3 and 11. Isn’t it true that IF (11) we have poor inventory replenishment and / or buying practices, THEN (3) we do not manage our inventory well?”CRT FinancialCauseAndEffect.jpg

 

This could stimulate discussions over batch-sizing, purchase lot sizing, order frequency and a multitude of other supply chain questions.

 

Ultimately, there is no right or wrong answer. The right answer is the answer that helps each individual organization get to the “roots” of the Current Reality Tree so that they know what they really need to work on in order to lead to real improvements in the near future.

 

Another example leading to innovation

 

Let’s talk about the thinking that might be stimulated by beginning with another “root” in the CRT. Entity 17 says, “Our product design is not integrated or well-planned.” Here, we are talking about the whole product research and development process, not an individual product.

We should carefully note where the logic beginning at this root takes the readers: IF (17) our product design [process] is not integrated or well planned, THEN (1) we do not manage our product lifecycles well AND (12) our truly variable costs (TVCs) are too high.

 

This is a “root” that Toyota recognized years ago, and how they have addressed it has helped to make them the most successful automobile manufacturer in the world. They not only design for manufacturability, their design and development process fully integrates key vendors ideas and concepts so that both production costs and the cost of components (TVCs) can be minimized over the lifecycle of the resulting product.

 

Go ahead.

 

Take time to read through the rest of the CRT in this article. We believe you will see a lot of the typical challenges faced by enterprises and supply chains. Reading it may even provoke you and your team to new insights on the causes of many of the fires you put out week after week, month after month.

 

Installing new Thoughtware

 

In their excellent book, Demand Driven Performance – Using Smart Metrics, authors Debra Smith and Chad Smith call for “installing new Thoughtware” into organizations and supply chains before laying out capital for more hardware (e.g., computers, production equipment, warehousing equipment) or software. We wholeheartedly agree.

 

Using “new Thoughtware”, like the CRT, in order to better understand what is keeping your enterprise from making more money tomorrow than you are making today is a great place to start.

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We would like to hear your comments, questions and learn about your experiences in a process of ongoing improvement (POOGI). Please leave your comments below, or feel free to contact us directly.