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Supply Chain Issues: Poor On-Time Delivery Performance

February 9, 2021 | 4 minute read

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on-time performance blog
John Edmonds
Written By
John Edmonds

Most operational supply chain issues fall into a few clear categories that, when approached in an orderly way, do not require drastic measures to solve. Our Supply Chain Issues series explores each of these categories and provides hands-on solutions for key decision-makers. To read the entire series please click here.

 

Key Points:

 

Is your lead time inflated by fear?

Nearly every supply chain manager we speak to answers yes to that question, their lead times are inflated due to excessive conservatism of missing on-time performance. They have rightly justified they need to pad out lead time, or risk not delivering as promised.  

Understandably so. There are many things that can go wrong in the supply chain, such as: 

  • Vendor delays because quality issues, product rejections, etc. 
  • Shipment delays due, for instance, inaccurate documentation, late container booking or port congestion. 
  • Delivery delays due to picking errors, late scheduling or late pickup. 
  • Poor supply chain management, including inaccurate forecasts, incorrect safety stock levels and late purchase ordering. 

 

Little wonder, the purchasing, logistics and customer service teams each inflate lead times. If the shipment arrives two weeks “early”, then congratulations all round. The real lead time may have been inflated by 20% - delivery performance measured by fictitious numbers.  

The flip side to running early is when a delivery runs late. The same reasons as above apply, but also add sales teams overpromising to customers. Most companies with a supply chain suffer from both, running ahead of and running behind time. What that boils down to is insufficient control of their supply chain.

 

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What is the cost of not delivering on-time?

Just how much it costs a business that isn't working to on-time delivery can be measured by an inventory carrying cost calculation. This metric compares business expenses related to holding and storing unsold goods to the value of inventory on hand. The greater the lead time inflation, the more inventory on hand. The following table shows how these costs often break down.

 

Internal rate of return (Cost of Money)

10.0%

$897,322

Shrinkage (Damage, etc.)

0.9%

$77,355

Space/Utilities

6.0%

$541,488

Lost Sales & Customers (Due to unavailable stock)

3.0%

$270,744

Additional freight (Expedited freight for late orders, low supply)

3.4%

$309,421

Overtime (Rush, late or replacement orders for lost/damaged)

2.1%

$193,388

Administrative Cost

4.3%

$386,777

Dead Stock, Obsolete Inventory

3.4%

$309,421

Total Yearly Inventory Carrying Cost

28.5%

$2,340,000

 

A company improving on-time performance would reduce or even remove additional freight costs (3.7%), overtime costs (2.3%) and lost sales and customers (3.2%). That adds up to nearly 10% of costs caused by poor on-time delivery performance. These expenses mount up when calculated over, say, one year or the term of a lease. 

The key to reducing costs is tightening up lead times so that the supply chain runs on-time, rather than behind or well ahead of time.  

That is easier said than done. Purchasing, logistics and customer service managers will all justify their lead times, and their explanation is going to make sense. Inflated lead times are a symptom not the cause. Often the catalyst for improving lead times and cutting costs comes when a business needs to rapidly improve financial performance, for instance when a new CEO comes in.

 

How can on-time performance be improved?

Getting to on-time delivery is entirely achievable but requires organizational focus and commitment. To resource this without disrupting operations requires finesse and agility. Here is what you can do on your own or with the help of supply chain experts.

 

Create a holistic understanding of your supply chain 

Before on-time performance can be improved the root-cause of deviations, negative and positive, from planned lead times must be understood. So, start off by creating a baseline: 

  • Review your customers’ service performance requirements and expectations.  
  • Document each process step in your supply chain, including purchasing (ordering and production), shipping execution (pickup, consolidation, main haul, port clearance, on carriage and delivery to the warehouse), warehouse operations (processing & fulfillment) and final-mile delivery.  
  • Document contractual service level agreements, including all vendors and the logistics providers involved with inbound or outbound transport or warehousing, and comparing them to actual performance.

 

Start measuring and implementing improvement initiatives

Once the baseline has been determined, the analysis phase begins by measuring the actual lead times of each process step and comparing them to the agreed service level agreements and customers’ service performance requirements and expectations. 

The outcome will be a list of opportunities for improving process and reducing cost. Map your improvement initiatives on a 2x2 chart and start with the easiest to implement and highest impact. Once prioritized, this will be the roadmap for improvement. 

Some process improvements may be simple to implement, for instance using better ocean routing options, but others might be revolutionary, for instance, changing distribution center of gravity to get closer to the core customer base. The last step is to implement the improvement measures.

 

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Achieve industry-leading on-time performance levels

Many on-time performance improvements are only possible if there is good visibility across the supply chain. That is why lead times are inflated in the first place – a lack of surety.  

To get that better visibility means deploying, as McKinsey describes it, a “real-time performance cockpit covering all critical supply-chain performance metrics across its planning, manufacturing, and logistics-execution processes.”  This may seem a big step, but it is basically the next logical step in the project. In effect, it is leveraging the data and information already collected to create a robust and digitized process platform integrated to both internal and supplier systems. 

 

 

With improved visibility, all stakeholders in the supply chain, internally and externally, can accurately predict inventory, manage purchase orders and follow shipments. By using real, validated data, supply chain teams have an opportunity to achieve industry leading on-time performance levels.

 

On-time performance impacts revenue

In 2017, Walmart introduced penalties for suppliers that failed to deliver as expected, with a few other big retailers since following suit. They use the on-time. in-full (OTIF) metric to measure compliance. Walmart’s  OTIF compliance guidelines require the shipment to be within a specific delivery window (arriving early is not counted as on-time), packaged and labeled as directed, and the product as ordered (correct product, correct amount). 

That has clearly increased the heat for some companies to improve on-time last mile delivery. Heinz sees the upside in this, using the threat of OTIF penalties as a spur to embed OTIF principles internally. That makes sense given how on-time performance improves overall performance - improved efficiency reducing costs, more satisfied customers increasing revenue. That is plenty enough reward alone for a company, and their suppliers, to set about improving on-time delivery.

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