Managing and Motivating Supplier On-Time Delivery

Author(s):

William S. Wehr, C.P.M.
William S. Wehr, C.P.M., Director-Quality Systems, Lewis-Goetz and Company, Inc., Pittsburgh, PA 15228, 412/341-7100

84th Annual International Conference Proceedings - 1999 

Abstract. Supplier on-time delivery performance is critical to enabling the buyer's organization to meet its customer service commitments. This paper summarizes the experience of Lewis-Goetz and Company, Inc. ("Lewis-Goetz") as an industrial rubber products distributor in analyzing the delivery performance of five key suppliers and developing improvement methods. Through analysis, fundamental defects in the Lewis-Goetz buying process and the supplier order entry process were identified to form the basis for improvement. The resultant improvement methods focused on transactional and relationship management techniques relating to the determination of required delivery dates, purchase order acknowledgment, effective delivery performance measurement, and periodic performance reporting. Increased communication between Lewis-Goetz and the supplier's organization beyond routine transactional contact was cited as critical to establishing and achieving mutual performance objectives to facilitate on-time delivery. This case study concludes with specific improvement recommendations that can be applied to nearly any supplier situation to obtain increased on-time delivery performance.

Introduction. A major portion of the customer support provided by Lewis-Goetz consists of fabricated metal and rubber hose assemblies to meet specific customer process applications. To meet customer delivery requirements, each Lewis-Goetz location maintains an inventory of metal and rubber hose along with a wide range of hose end fittings. Hose assemblies are fabricated for inventory and as needed in response to specific MRO customer requirements. A number of Lewis-Goetz customer requirements are for OEM components which dictate the purchase of a wide range of molded parts from various suppliers. Since assembly fabrication using inventoried hose and fittings is dependent on on-time inventory replenishment when reorder points were reached, one hose and fitting supplier was selected for the case study along with three fitting suppliers. As indicated in the supplier overviews below, each of these four suppliers had significantly low on-time delivery performance and repeated instances had occurred in which customer orders were late due to failure of the supplier to deliver on-time. Lewis-Goetz had initiated an aggressive inventory management process to reduce on-hand stock thereby placing increased importance on timely delivery by its suppliers. A fifth supplier was also included in the study to address on-time delivery of custom fabricated OEM components. Although many of these components were ordered as needed by the Lewis-Goetz customer, some components were inventoried by Lewis-Goetz in large quantities to buffer chronic late delivery by the supplier.

Supplier Selection and Performance Overview. In selecting suppliers to be included in this case study, manually compiled delivery performance data over a period of eight months on 49 suppliers was reviewed. Only those suppliers with an on-time delivery percentage of 68 percent or lower with an average of three or more shipments (shipments consisted of multiple line items) per month were considered for the study. Final selection was made based on a subjective evaluation of the supplier's history of adverse impact on Lewis-Goetz customer service. Summarized below is the performance data for each of the selected suppliers:

Case Objectives. This case study was undertaken to develop a practical model for on-time delivery management and motivation that could be used by Lewis-Goetz for company-wide application to improve supplier delivery performance. The five suppliers identified above were selected as representative of that portion of the supplier base which was providing unsatisfactory delivery performance. Specific objectives were:

1. To realize that supplier on-time delivery was affected by both buyer and supplier processes. Included in this objective was the premise that some modification to the buying process used by Lewis-Goetz may be required along with changes to the supplier's processes that affected order fulfillment.
   
   
2. To identify those elements of the buyer and supplier processes that affect supplier on-time delivery. Primary emphasis was placed on the transaction elements that impacted the establishment of required delivery dates.
   
   
3. To develop specific methods and techniques to manage and motivate supplier on-time delivery. A key concern in achieving this objective was to modify existing processes to provide continuing management and improvement rather than providing a "one-time" fix or cure.

Buyer On-Time Delivery Process Summary. For suppliers "A" through "D", the Lewis-Goetz buying process supported the ordering of stock replenishment items. A key realization that resulted from examining the Lewis-Goetz delivery process was that communication rather that material movement was the most critical element. The importance of the communication was evident in reviewing the sequential elements of the Lewis-Goetz buyer delivery process as outlined below:

1. Communication of the requirement to the supplier - This element included defining the material to be purchased, specifying the quantity, and creating a purchase order. Nearly all purchase orders for Supplier "A" through "D" were transmitted to the supplier via facsimile.
   
   
2. Lead time consideration by the buyer - Lead time needed by the supplier was based on a "customary" period used for a particular supplier. Unusually large quantities were not generally taken into account; rather, the initiative of the supplier in responding via an acknowledgment was used to compensate for improper lead times.
   
   
3. Determination of required date by the buyer - Required dates were generally based on the "customary" lead time used by the buyer as described in b. above. In the case of urgent customer requirements, there was a tendency to set an "optimistic" required date to motivate supplier performance. Each supplier regarded the required date as a ship date thereby eliminating transportation time from their on-time consideration.
   
   
4. Exception feedback from the supplier - Suppliers were expected to provide written acknowledgments to the Lewis-Goetz buyer to either confirm or change the required date indicated in the purchase order. This communication was vitally important in setting realistic delivery dates since most orders were unilaterally communicated to the supplier via facsimile. Unless the supplier acknowledged a different required date, the purchase order required date remained as the determining factor for on-time delivery.
   
   
5. Adjustment of the established required delivery date - Lewis-Goetz buyers were consistent in extending delivery dates based on the supplier's acknowledgments. If buyer expediting determined that delivery would be later that the required date, a change was made to the order status; however, the shipment was regarded as being "late."

Supplier On-Time Delivery Process Summary. The supplier's delivery process in response to Lewis-Goetz purchase orders was generally the same for each of the five suppliers except Supplier "E". Since Supplier "E" is a much smaller organization than the other four suppliers, a customer service department does not exist. All orders received from customers are handled directly by the Supplier "E" General Manager from which point scheduling and fabrication are directed. The elements and sequence of the supplier delivery process for Suppliers "A" through "D" are summarized below:

1. Receipt of the buyer's requirement - All suppliers except Supplier "E" required that purchase orders be transmitted via facsimile for accuracy and completeness. This procedure usually eliminated interactive communication at order entry to provide real time delivery feedback before the required date was established by the buyer.
   
   
2. Acknowledgment of purchase order - None of the selected suppliers were consistent in providing acknowledgments to the Lewis-Goetz buyer.
   
   
3. Shipment from inventory or production scheduling - Only through expediting of open orders by the Lewis-Goetz buyer was there any indication of whether orders would be shipped from existing inventory or future production.
   
   
4. Internal expediting to meet established required date - None of the selected suppliers demonstrated any internal process for expediting Lewis-Goetz orders and communicating the resultant status to the buyer.
   
   
5. Responding to buyer expediting requests - Supplier response to expediting requests was generally good when the contact was made verbally by the buyer rather than by facsimile transmission of open order lists.

Performance Measurement Process. Although, Lewis-Goetz buyers generally concurred on the definition of on-time delivery, the computer data base did not allow supplier delivery performance to be accurately measured. (Note: Data for the survey was collected manually by reviewing completed orders and the related expediting documentation at the end of each month during the sample period.) This deficiency was partly attributable to the subjective considerations used by the buyers in changing established required dates. Suppliers that responded with written acknowledgments were allowed to extend the required date without performance penalty. Suppliers that did not provide acknowledgments were held to the initial required date indicated in the purchase order. In practice, suppliers effected multiple extensions of the required date through a series of acknowledgments. If the acknowledgment was received before the latest extended date, the required date was modified. This subjectivity was partially due to the lack of precise lead times at the time purchase orders were created and transmitted to the supplier via facsimile. Therefore, the acknowledgment process was used to correct or amend the buyer's original lead time assessment which was largely based on custom and recent supplier history.

Buyer-Supplier Relationship Factors. The above delivery process summaries are transaction focused and do not address the overall relationship between Lewis-Goetz and the selected suppliers. Relationships are part of the overall communication process and significantly affect performance motivation. The regional sales representative for Supplier "D" calls periodically on the buyer and attempts to become involved in delivery and transaction issues. Supplier "A" has a technical representative that is in frequent contact with Lewis-Goetz but does not become involved in delivery or related issues. Periodic meetings between Lewis-Goetz and the senior management of Supplier "A" have been held with some discussion of specific performance issues. However, no continuing measurement or problem solving process was established. Suppliers "B", "C", and "E" do not have sales or technical representatives that visit Lewis-Goetz buyers. Although implied sourcing commitments have been in place for many years, there is not a continuing mutual strategic commitment between buyer and supplier.

Analysis of the On-Time Delivery Process. The on-time delivery process is comprised of buyer inputs, supplier inputs, buyer-supplier relationships, and measurement. An assessment of each of these areas is provided in the following paragraphs:

1. Buyer Inputs - Unilaterally using "customary" lead times to establish required dates has not provided a definitive baseline for measuring on-time delivery. The acknowledgment process for both Lewis-Goetz and the supplier is tedious and ineffective. As a consequence, extensive expediting must be performed to compensate for the lack of acknowledgment response.
   
   
2. Supplier Inputs - Suppliers do not have an effective method for internally managing customer required dates and are not motivated to proactively update the customer when delivery status changes.
   
   
3. Buyer-Supplier Relationships - The lack of a mutual strategic sourcing commitment and a structure for continuing performance review has reduced these relationships to transactional entities.
   
   
4. Measurements - Effective on-time delivery assessment requires that definite criteria be established and consistently applied to measure supplier performance. Objective data is needed to provide meaningful performance reporting and gauge the effectiveness of improvement actions.

Management Techniques for Improving Supplier Delivery Performance. Three specific management techniques were identified through this case study to improve supplier delivery performance and more effectively utilize both buyer and supplier resources:

1. Eliminate use of the supplier's acknowledgment to confirm the buyer's required delivery dates. Instead, required dates should be based on a documented standing leadtime schedule issued and periodically updated by the supplier. Whenever, conditions within the supplier's organization change to the extent of impacting these standing lead times, the supplier's representative should immediately provide the buyer with the updated information. If the buyer's situation requires supplier performance to exceed the standing lead time commitment, the buyer should contact the supplier to confirm the delivery date before releasing the purchase order. Suppliers should perform systematic internal expediting to insure that lead time commitments are fulfilled and that problems are identified at the earliest possible time.
   
   
2. Each late shipment should be regarded as a process defect and reported by the buyer to the supplier for corrective action. The buyer should be open to constructive comments from the supplier regarding defects in the buyer's process that may have contributed to the late receipt. The objective of defect reporting is to enable both parties to continually assess the extent to which improvements need to be effected in their respective delivery processes.
   
   
3. A strategic vision meeting should be periodically held with senior management and middle management representation from the buyer and supplier organizations. The initial meeting should provide an overview of each party's processes, objectives, and performance concerns. Subsequent meetings should address performance goals and the measurements used to assess performance.

Motivational Techniques for Improving Supplier Delivery Performance. In addition to the management techniques outlined above, two motivational techniques are recommended to further enhance supplier delivery performance:

1. Establish a valid measurement system for supplier on-time delivery that is line item based and automatically driven by material receipts. Measurements should address the supplier's conformance to the buyer's required date and conformance by the buyer to the supplier's lead time schedule.
   
   
2. Report supplier delivery performance on a monthly basis and conduct quarterly or semi-annual performance review meetings. These meetings should be attended by buyer and supplier senior management along with other concerned individuals.

Conclusion. As determined by this case study, supplier on-time delivery is affected by buyer and supplier process inputs. Due to volume and frequency, transaction concerns often become the primary focus and obscure the issues that must be addressed to improve on-time delivery. Communication and management of the communication process can be more important than material issues in improving on-time delivery.

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