Mastering supply chain management

There was a time when customers tolerated late or incomplete deliveries. However, with the advent of internet shopping, the rule book has changed. Many customers now say: “if you can’t manage 95% minimum on-time-delivery (OTD), don’t bother working with us”. Due to the way supply chains mesh together, this means a 95% or higher OTD rate is becoming the global norm.

The two official ways of starting the purchase process is either a request for quotation (RFQ) or letter of intent (LOI). The supplier will make an offer that includes minimum order quantity, minimum delivery quantity, unit cost and lead time. If acceptable, a purchase order will then be issued that concurs the offer, and includes T&Cs for late/early delivery and non-conformity penalties. Vendors should understand that today's customers measure their performance periodically, based on safety-quality-cost-delivery metrics and grade their scores accordingly. While a “C” grade requires observation, a “D” grade means remedial action or even de-sourcing.

What do you do if your supplier consistently fails your KPI targets? If every supplier that failed to meet your SQCD targets was removed from your vendors list, you would soon have no suppliers at all. The way forward is to routinely visit and audit them. 

Here is what to look for: 

1. Are the purchase orders entered in the Enterprise Resource Planning (ERP) system within two working days?
2. Are purchase orders (quantity, date and drawing index) acknowledged within three working days, and according to a procedure?
3. Are minimum-order-quantity and minimum-delivery-quantity communicated?
4. Is the supplier order book properly maintained with customer demand/forecast for at least six months?
5. Is someone responsible for the customer OTD within the supplier?
6. Is the supplier OTD tracked every month and shared with senior management?
7. Are there formal OTD improvement plans, based on the root cause analysis of losses?
8. Is this plan reviewed at least monthly, showing results and KPIs?
9. Is there any contingency (safety stock, safety period, etc) to protect the customer?
10. Is customer communication proactive on issues affecting OTD performance (such as an early warning system)?
11. Are sub-contractor OTDs monitored at least monthly?
12. Are bottlenecks for parts delivery identified and communicated to the customer?
13. Is there a rolling review of the available capacity versus demand, covering bottlenecks and customer forecasts?
14. Is there a weekly rolling production plan with at least one-month visibility?
15. Is the production plan monitored weekly, analysed and adhered to?
16. Are purchased materials shortages analysed and compared with the production plan?
17. Are subcontractors informed in reasonable time about the customer forecast, purchase orders and logistics requirements?
18. Is value stream mapping (or an equivalent tool) used to reduce lead time and increase flexibility?
19. Are logistics, non-conformities (wrong packaging, quantity mistakes, mislabelling, etc) recorded and used to construct a formal improvement plan?

Sometimes, suppliers are simply unable to improve their supply chain management. Where 12-month KPIs don’t improve by at least 25 per cent after remedial action, it may be time to draw the curtain on your business with them.