Saturday, April 5, 2008

Are your suppliers helping you, or hurting you? (Part 1)

It is a cliché but it is still true. You don’t know what you don’t measure, and you can’t improve it either. Retailers need to maintain their service levels, they need to make sure that the shelves are adequately stocked with the right merchandise when customers come looking for it. This is no small job, given the large assortments, complex replenishment processes, and a large number of suppliers.

Suppliers (used in a generic sense including merchandise suppliers and carriers, alike) play a huge role in smooth operations of a Retailer especially in the execution phase. They affect what gets shipped, where, how much, when and in some cases, how. While there is a mutual expectation for compliance to Retailer’s requirements, it may not always happen. Unless of course, Retailers measure their suppliers for good execution performance and process compliance.

Here is a quick primer on what to measure for effective supplier relationship that compliments your business goals rather than hurting you. In Part 1, we will discuss what I call Fulfillment Execution Metrics, and in Part 2, we will cover the Process Compliance Metrics. Together these metrics provide a comprehensive view of the working relationship with the suppliers, and can help point to areas of opportunities for mutual benefits.

Fulfillment Execution Metrics:

Fulfillment execution measures how effectively the suppliers fulfill the merchandise orders. The process efficiency revolves around the three main factors, Quantity, Quality, and Time.

  • Quantity: This metric primarily provides the fulfillment rates. There are various quantities that could be measured for effectively measuring the order fulfillment process. These are Ordered v. Confirmed; Confirmed v. Shipped; Shipped v. Received; Shipped v. Invoiced; and finally a Fill Rate calculation that makes sense for a Retailer. Most relevant definition will be to compare the Ordered Quantity to Received Quantity. Other quantity comparisons mentioned above (if routinely short of expectation) simply point to the sub-process that may be under optimized and needs attention. A Perfect Order metric is usually a composite metric generated from the above as orders that were fulfilled on-time, complete, damage-free, and accurately invoiced. However there is no single definition of perfect order and this metric can be computed based on what makes the most sense for a retailer.
  • Quality: Most Retailers do not require inspection on inbound merchandise. However the quality matters. It affects Retailers’ operations through increased consumer returns, unsatisfied customers, and additional labor to process returns. Retailers can get a good grasp on quality by measuring Damaged Packages, Damaged Goods, and Customer Returns. The first two can be made part of the warehouse SOP. Visually check damaged packaging at receiving, and flag the transaction. Check for damaged goods when pallets are broken into case/boxes/eaches. Customer returns are captured through the store returns process or RMA generated/received for the other channels.
  • Time: This is third metric for measuring the effectiveness of the fulfillment process. There are two types of metrics for time that should be tracked.
    • First one of them is the lead-time. There are various types of lead-times that are important. The total fulfillment lead-time consists of lead-time components that are controlled together by the supplier, and the carrier. Some of these components are the Order Acknowledgment Lead Time (time between the order (850) transmission date, and order acknowledge (855) receipt; Order Processing Lead Time (time between order (850) transmission date and RTS (ready-to-ship, typically EDI document 753, request for routing); Ready to Ship Confirmation Lead Time (time between receiving a 753 request, and sending back a 754, routing instructions document); and finally the Transportation Transit Time (time between pick-up shipment status message, 214; and yard-check-in at the destination facility). Keeping tabs at the lead-time provides realistic data for replenishment systems that helps create correct demand forecasts. Trends in lead-time usually point to a broken sub-process.
    • The second one relates to the activity level SLA (service level agreements). Examples in this category are violations of pick-up and delivery-time windows by the carriers.

      Once these metrics are measured, they can also be shared with the suppliers as a score-card. Retailers can use them to identify the top and bottom suppliers to prioritize their relationships. And finally, Retailers can charge-back when suppliers fail to live up to contracted service levels.

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