You may think that Demand Management in Supply Chain is straightforward. Oh, how wrong you would be! Here in the UK, we have a problem with OTIF (On Time, In Full), and it is that the customer doesn’t stick to their own rules. What makes it worse, suppliers are often unwilling to stand up to them.
This creates confusion, delays and unnecessary cost for both customer and suppliers. Something is clearly wrong, and much of it is due to how we negotiate delivery, and how suppliers fail to enforce the customers’ contractual obligations.
Let’s imagine that at a major manufacturer (the customer) defines each stage of production which allows suppliers downstream to organize their own production processes accordingly. The number of assemblies is known, so all the components required from suppliers is predictable. Everybody in the Supply Chain knows what to produce or take delivery of, in exactly what quantities and when.
Sounds simple, right? There are, however, a number of realities in Tier 1 and 2 businesses that make this anything but simple.
How The Customer Unintentionally Throws OTIF Out The Window
Development may not be able to plan their requirements effectively and may scrap unpredictably. Spares should be predictable and forecastable. In my industry (areospace), AOG (Aircraft on Ground) requirements should normally be deliverable from spares stocks for production aircraft but legacy programmes may not hold sufficient stock.
Demand Planners will adjust re-order batch sizes and minimum stock levels and then adjust them, placing delivery pressure on suppliers. They also adjust planning lead times, which throws a spanner in the works for even the best organized supplier.
Production scraps components and assemblies and (unpredictably) discover quality issues that are not noticed upon delivery. They also change production methods that alter planning lead times and line side stock requirements.
Operations fail to book delivered batches to stock, or incorrectly book them. They also hold deliveries in quarantine for extended periods to check for quality issues (then ultimately book to stock if resolved).
How Customers Create Unnecessary Pain For Suppliers
When customers do any of the above, suppliers have to absorb the resulting demand noise into their manufacturing planning process, and have to commit material, machine and labour capacity. But because of the customer’s disruptions, they cannot sell the parts for another few weeks. Suppliers typically have difficulty in managing changes in quantity and delivery date for parts that have been agreed to be delivered on a weekly schedule, especially considering that they often make over 100 different parts which requires careful planning and organization. Any change can cause havoc.
Customers agree a Firm Zone with the supplier, and they should stick to this. This is, after all, the planned manufacturing lead time that both sides committed to. As part of the OTIF agreement, the customer is contractually bound to accept delivery of components where the demand falls into the Firm Zone and the Supplier can insist the Customer take delivery if such demand is accepted and then rescheduled out again. But in reality, do suppliers enforce the contractual agreement? All to often they don’t.
But they must.
When customers schedule demand out of the agreed Firm Zone they’re breaking the contract and making life extremely difficult for tier 1 suppliers, creating problems that often ripple down to tier 2 and tier 3 suppliers. Not robustly managing customer schedules and ensuring they to stick to contract terms is a very common problem and results in:
• Constant pressure to change the production schedule
• Unpredictable weekly re-schedules in and out
• Launching of work orders that then stop and are held
• Rush jobs that need to be prioritised to meet customer delivery expectations
The net result is ineffective use of capacity, ineffective use of resources, and holding significantly more inventory than is necessary to satisfy the forecast.
What Customers Must Realize
Supplier Management teams using OTIF as the sole measure for their own performance and that of their suppliers causes disruption and inefficiency in the supply chain that compromises their other key objectives of delivery reliability and ultimately, minimising cost of supply.
The Suppliers ability to demonstrate that they plan appropriately and show they are Rate Ready for all parts to all Customers is vital, and once a Supplier can do that, flexibility in managing weekly demand change can produce an overall better result.
What Suppliers Must Do
• Robustly manage customer demand changes within lead time and not introduce short term demand changes into their planning processes despite pressure to do so.
• Confidently show that they are Rate Ready for all of their customers’ parts and drive that rate in their day to day management of the factory, not chase the short-term customer demand changes.
• Ensure their systems and data are set up properly and that demand management processes are consistently driven by their internal team.
These problems are endemic in British manufacturing, and we wonder why the UK is 15.0% less productive than the G7 average – but more on that in another post!