This is a contributed op-ed written by Tom Kieley, CEO and co-founder of SourceDay. Opinions are the author's own.
Over the last few decades, supply chains have scaled so quickly, become so complex and been so patchworked together on a global scale that the industry collectively forgot to take a step back and agree on the critical rules for what great supplier performance looks like.
It starts with "on time, in full," the ultimate measure of supply chain performance that no one can seem to agree how to measure. If you ask a dozen different supply chain decision-makers at a dozen different companies how they define OTIF you’ll get a dozen different answers.
Nothing hinders supply chain performance — or the strategic role it should be playing in board-level discussions about business performance — more than a low OTIF rate. The problem, in part, lies in the lack of a universally recognized industry standard for OTIF. If you don’t know how to define the problem, how can you ever hope to fix it?
There’s no easy way out, but there are critical steps every company can take internally to more clearly define OTIF and ultimately to improve supply chain performance and mitigate disruption.
The need for an industry standard
What OTIF stands for is about the only thing on which the supply chain profession can agree. The consensus, however, ends there.
A 2019 McKinsey report on OTIF in the consumer sector defines OTIF as "the extent to which shipments are delivered to their destination according to both the quantity and schedule specified on the order. In theory, OTIF should be the ideal mechanism to align the objectives of retailers and manufacturers."
But it's not. As it exists today, OTIF is entirely up for interpretation. There is no set industry standard, every supply chain player is at liberty to define OTIF differently. It's dealer’s choice, and everyone’s the dealer.
To give a better understanding of why and how these discrepancies have the potential to be so problematic, let’s look at how OTIF definitions can vary.
McKinsey offers a critical question: "Does on-time mean the order arrives by the delivery date requested by the retailer or the delivery date promised by the manufacturer?"
Improving supply chain performance — and finally hitting the tantalizing 90% OTIF — begins and ends with improving supplier relationships and performance.
CEO and co-founder of SourceDay
And what about early deliveries: The order wasn’t late, but it didn’t arrive at the time it was expected, so does that still count as on-time?
What if the shipment is late, but the delay is effectively communicated and acknowledged by both parties? Is that considered on-time?
And what constitutes in-full? Does that mean the order is 100% complete and contains every item listed on the initial purchase order in perfect condition? Or did the buyer order more than what was actually needed to compensate for incomplete deliveries, then declare all parts they actually needed were delivered on time?
The sheer variety of answers to questions like these creates more unnecessary complexity. Suppliers are essentially being asked to speak dozens of different languages at the same time. Many companies don’t even have static definitions or metrics tied to OTIF. They change over time, meaning suppliers are forced to jump into a revolving door blindfolded, then get yelled at for hitting their heads against the glass.
Just as important, organizations don’t have a standard they can compare their own supply chain’s performance. At best, they can track month-over-month or year-over-year OTIF improvements, assuming their own internal definitions don’t change.
An OTIF workaround
Luckily, there’s a workaround. A recent Hackett Group study determined that, to maintain customer satisfaction, 90% of orders must be considered perfect, meaning they must arrive on time, in full and with no issues or damages.
So, how do we fix it?
Step one: Determine ownership of OTIF internally. Then define it.
With the complexity of global supply chains and the impact that low OTIF rates have on overall business performance, there’s never been a better time to elevate the conversation around supply chain performance to the C-suite and board levels.
While the day-to-day management of supplier relationships and procurement undoubtedly remains in the buyer’s purview, executive-level decision-makers should assume more responsibility in supply chain performance. As part of strategic business planning processes, executives should constantly be asking their supply chain teams, "What is our current OTIF rate?" That question will open the door for more detailed conversations on how supply chain teams calculate OTIF, how they assess supply chain health, and how supplier performance is affecting customer commitments and inventory velocity, or creating points of failure that need to be addressed.
When there is no right answer, the only solution is to get as close to right as possible. Don’t simply create a definition that gets your OTIF rate as close to 100% as possible. Doing so just buries the underlying problems without actually resolving them. Build an objective definition for OTIF and how you will measure it as a function of performance, then calculate it. Most importantly, communicate that change to your suppliers early and often, making sure they acknowledge it.
Then, repeat it again, and don’t change it later down the line.
Step two: Create systematic measurements that predict and prepare for disruption.
Improving supply chain performance — and finally hitting the tantalizing 90% OTIF — begins and ends with improving supplier relationships and performance. It’s the only way to truly account for changes in the supply chain that are as constant as they are guaranteed.
But change doesn’t have to equate to poor performance, and there are several steps companies and teams can take to decouple the two.
First, recognize that your ERP is not the trustworthy data center you may think it is. Your buyers, not your ERP, are the ones communicating with your suppliers, so your ERP data is likely outdated and doesn’t reflect the actual state of purchase orders, lead times and inventory status.
Then, elevate the role of the buyer-supplier relationship so that suppliers can be strategic partners, thus overcoming their data and tool limitations that would have inevitably affected your OTIF rate.
You can't have true OTIF to your end customer without real-time visibility, accountability and collaboration with your supply chain.
CEO and co-founder of SourceDay
Finally, under your new definition, evaluate supplier performance:
- How frequently do their lead times change?
- How quickly do suppliers alert you to order changes?
- How quickly do they acknowledge changes on the buyer side?
- How often are they early, on time or late within your delivery window?
- How often do you pay expedite fees or customer penalties?
- Which suppliers are always delivering late and creating stagnant inventory?
- What can we do on our end to improve our own suppliers’ performance?
Once you have the answers to these questions, you can hold your suppliers more accountable, begin to predict where the changes will come from and have the data and insight to improve your supply chain performance.
Step Three: Re-evaluate supply chain and supplier performance.
This is the step where overcoming the supply chain industry’s lack of an agreed-upon standard definition for OTIF comes into play. Evaluating your own processes not only allows you to identify the source of your problem, it also gives you a good benchmark to track performance improvements.
JBT AeroTech is an example of a company that has done this extremely well. By implementing processes to measure and report on supplier performance, JBT saw on-time delivery from suppliers increase from 68% to 89%. This, in turn, enabled JBT to improve its own performance and increase on-time delivery of finished goods to customers from 69% to 89%.
With internal standards that don't change, supply chain teams will finally be able to ask the right questions about performance. They’ll likely find that they were consistently overbuying to compensate for low delivery rates or poor supplier performance and can begin to address the underlying issues.
The greatest of these, they will find, is lack of visibility and holes in their ERP data that make it nearly impossible to collaborate with suppliers to address real-time changes in their supply chains. But at least now they know, instead of burying the problem so deep they’ll never be able to find it again.
The reality is, you can't have true OTIF to your end customer without real-time visibility, accountability and collaboartaion with your supply chain. To guarantee a better end result for your customer and bottomline, companies must have confidence from end-to-end that they can deliver.
This story was first published in our weekly newsletter, Supply Chain Dive: Operations. Sign up here.