SCDigest: Perfect Order Achievement Still Elusive in Consumer Goods-to-Retail Supply Chain
By SCDigest Editorial Staff
Through a special arrangement, presented here for discussion is an excerpt of a current article from Supply Chain Digest.
The Perfect Order has been around for a long time, but a new study shows that many challenges remain in the quest for “perfection” in the consumer goods-to-retail supply chain.
The study was performed by Kate Vitasek of Supply Chain Visions, a well-known consultant and educator on supply chain performance measurement on behalf of VCF (formerly the Vendor Compliance Federation). The full report is available from SCDigest: Benchmarking the Perfect Order.
The report provides an update to a similar study based on 2005 data from five retailers, across multiple segments. Those retailers allowed VCF to analyze their data, based on almost 200,000 purchase orders, with regard to key measures of the Perfect Order.
While there are many definitions of “Perfect Order,” the most common includes four metrics:
- On-Time Delivery
- Complete/In Full
- Zero Damage
- All Documentation and Labeling Complete and Accurate
By combining those four metrics in an equation, a “Perfect Order Index” (POI) can be created: percent on time X percent complete X percent no damage X percent all documentation and labeling.
The Perfect Order is challenging because the measures are “binary” – that is, each metric for an order is perfect or it isn’t. An order that is 99 percent complete still fails because the order is not perfect.
In addition, the multiplicative nature of the POI equation means even small to mid-sized misses in an overall metric quickly generate very low overall scores.
The good news: Perfect Order achievement from this study base was up 40 percent in 2007 versus the baseline study in 2005. The bad news: that still only represented a 27 percent perfect order score, and even that is somewhat inflated due to the difficulty in obtaining data about damage. As a result, shipments for the measure were assumed to be damage free, which of course is not the case.
While many manufacturers have been using variations of the Perfect Order for some time, the retail industry itself has been relatively slow to embrace Perfect Order as a key reporting mechanism – but that is changing according to VCF Managing Direct Mark Jones.
“We are seeing a clear increase in the number of retailers adopting or considering the Perfect Order metric,” Mr. Jones told SCDigest. As that happens, it will have a significant impact on both retailers and manufacturers.
Discussion Questions: Do the results of the Perfect Order Study surprise you? Would you expect to see greater improvement over the next few years than we saw from 2005 to 2007? What will be the impact if many retailers adopt this metric for suppliers?
The thing that troubles me about this metric is that it assumes that a “perfect” score of 100 would optimize the supply chain. It fails to take into account any incremental costs associated with that “perfect” score.
The objective should be on continually improving the performance in each of the four metrics without increasing costs anywhere in the supply chain (merely pushing costs back down the chain is ultimately self defeating).
I am somewhat surprised at the low numbers for on-time delivery and percent complete. I expected higher numbers for large retailers with sophisticated supply chain management systems such as Walmart and Target. Large retailers and retailers selling staples with low numbers of SKUs have higher Perfect Order scores than retailers selling fashion merchandise with higher numbers of SKUs. It would be interesting to look at “best practices retailers” and the break down of performance by type of retailer.
Retailers with sophisticated supply chain systems probably will not be able to squeeze more costs out of their systems in the future. Supply chain management benefits in the future will come from increasing demand by tailoring store assortments to local market needs rather than increasing complete and on-time percentage.
As an aside, the multiplication formation of the index is potentially misleading. If the four measures were 90%, the Perfect Score Index would only be 65%.
The definition of the perfect order has to change.
It’s not enough to be on time, contain the right quantity, have correct documentation (but that’s another story with 10+2) and contain zero damages. There’s also the notion of 100% compliance to specification. That’s not the same as “zero damages.”
The lack of compliance to specifications is the biggest challenge for retailers when it comes to private label merchandise. I somehow suspect the same is true for brand managers, most of whom out-source their production as well.
This lack of compliance can be as innocuous as poor glue formulation on shoe soles, causing them to fall apart after purchase, and as serious as melamine in infant formula. Bottom line: compliance to specs is now as important as traditional metrics in evaluating suppliers.
The concern that I have (if retailers adopt the metric) is that most retailers set every goal at “100%”/they aren’t in the business of setting less-than-perfect standards though of course, they tolerate them every day, knowing that perfection is unachievable in the end. Will retailers be comfortable setting what “sounds” like lower standards in POI?
Also, my clients tell me, and I know from first-hand experience, that some retailers’ still-faulty ordering systems and presentation minimum standards can derail in-stocks and other post-order dynamics which end up impacting re-orders. I think vendors are looking for ways to quantify retailer-caused systemic problems when each retailer has unique systems. Only then do you truly have the “perfect order.”
I’m not really surprised by the results of this study. Supply chain is exactly that. A chain made up of links that keep it together. If one link fails, then there is a hole on the shelf.
For me, the chain extends from the factory all the way to the merchandiser’s case cutter. A completed order is when the shelf is full and displayed correctly. There have been huge improvements in ordering and shipping, and RFID should simplify things in the near future. Execution and staging is where I see opportunities.
The numbers are not surprising. When humans are involved in any equation, there will be errors. With the economy slowing in 2007 and into 2008, companies are looking for ways to economize and items in the Perfect Order chain may be compromised.
Perfect Order might be good for retailers to adopt, but they should consider the results of the study to set realistic goals for suppliers. The tendency in retail is to push costs to manufacturers. In a tenuous economy, this urge must be tempered by economic realities.
When we are talking about an industry that has a large turnover rate such as Supply Chain, this score is relatively good. Overall improvement of over 40% in two years is good and could be skewed based on the candidates for the survey.
I expect to see more improvement over the next few years because companies are getting better about automation, training and procedures.
Retailers may not adopt this specific metric but they should all focus on the impact of a perfect order on sales, customer satisfaction, inventory control and bottom line profits.
Voltaire: “Don’t let the perfect be the enemy of the good.” Or in the supply chain, the goods. Is “perfect” always worthwhile? Aren’t reasonable tolerances often more economical? Every retailer has known since forever which suppliers ship poorly and which suppliers ship well. Every supplier knows his/her retailer’s tolerances and which retailers have the sloppiest ordering and receiving procedures.
Funny how so much focus is put on “the perfect order.” What about focusing on “the perfect store” or “the perfect warehouse” or “the perfect software”?
I must agree with Ted Hurlbut. A higher perfect order score does not mean a more efficient supply chain. While many contributors rightly point out that there are both technology and procedural improvements that can and should reduce the incidence of outright errors, it just not cost effective to build the inventories and ‘surge’ production capacity to somehow give every retailer whatever amount of product they happen to ask for, whenever they decide to order it.
If trading partners want to get serious about improving end-to-end efficiency and effectiveness, they should work together using stochastic multi-echelon inventory optimization tools, which will show how to strike the optimum balance of cost and revenue, taking into account the uncertainties inherent in demand, transport times, and production yields – while putting a monetary value on capacity, working capital, transport costs and stockouts. When done correctly to set policy-based analytical inventory targets at the store, DC and factory warehouse, you can actually go so far as to eliminate the whole process of creating orders and reconciling back to them versus actual shipments.
Focusing on the perfect order rather than the drivers of cost and revenue may actually be counter-productive.