What do you expect from a vendor? Most distributors, manufacturers, and retailers expect to receive the products they order:
- At the lowest possible price.
- On time.
- In salable or usable condition.
- Packaged to minimize the cost of preparing the item for sale or use.
How do you measure a vendor’s performance in meeting these expectations? Most companies judge vendors on “gut feelings” and anecdotal experiences. Few have any objective measurements. In this article we will discuss three ways you can determine how well your vendors are helping you achieve the goal of effective inventory management and which of these methods produces the best results.
The Customer Service Level
In a previous article we introduced the customer service level as a good method to determine how well you meet your customers’ expectations of product availability. The customer service level measures the number of line items that are filled completely before the promise date. For example, if your customer orders 100 pieces of a product and you deliver 100 pieces on or before the promise date, you get credit towards the customer service level. Delivering anything less than 100 pieces on or before the promise date is viewed as a customer service failure. The customer service level can be adapted to determine the number of purchase order line items that are delivered on or before the promise date. After all, if this measurement is good enough for you to measure the service you provide to your customers, shouldn’t it also be valuable in determining how well your vendors are servicing you?
Average Number of Days Late
The customer service level is a pass-fail test. If the vendor ships or delivers the entire quantity ordered by the promise date, they get credit. If they ship late or don’t ship completely, they get no credit. But the customer service level treats a shipment that is two days old and one that is two months old equally. They’re both considered failures. But aren’t you more concerned with shipments that are long overdue? Isn’t a shipment that is two weeks late usually a bigger problem than a shipment that is two days late? To better judge the performance of your vendors, we need a more comprehensive measurement. The average number of days late is calculated with the following formula:
Total number of line items received this month
The total number of days late is the number of days between the promise date and the date the line item was completely received or the balance canceled. In dealing with vendors, the average number of days late is usually a better measurement than the customer service level because it quantifies the vendor’s inconsistency. Qualifying each vendor’s inconsistency in lead times is very important. In order to maintain superior customer service, you must maintain more safety stock (i.e. reserve inventory) to compensate for greater inconsistencies in vendor lead times. This additional safety stock raises the average value of stock inventory and results in decreased corporate profitability.
Vendor Satisfaction Analysis
In addition to goods arriving on time, they must be in salable condition. Our third measurement, the vendor satisfaction analysis, tracks the number of line items ordered from a vendor that cannot be sold or used on the promise date. This analysis classifies each problem item by:
- Vendor
- Item
- Problem preventing the item from being used
Typical problems include:
- The product was not delivered on time.
- The product ordered was not the product received.
- The wrong quantity of the product was received.
- Necessary manuals or other documentation were not delivered with the shipment.
- The product arrived damaged.
- The wrong price was charged for the material.
- The packing slips and/or invoices were incorrect or incomplete.
Every month you should look at several measurements produced by the vendor satisfaction analysis for each of your key suppliers:
- Percentage of line items delivered without any problem.
- The percentage of line items experiencing each type of problem.
- The number of occurrences of each problem experienced by a particular item during the previous 12 months.
Determine if the problems:
- Had a negative effect on the service you provided to your customers.
- Caused you to maintain additional inventory to maintain a satisfactory customer service level.
- Increased your operating costs.
Share the results with your vendors. Can you help them reduce errors in the future?
- Collaborative forecasting – Can you provide your vendors with better predictions of your future needs? Your vendors can probably better serve you if they know what you think you will order in the upcoming several months.
- Report damaged material – Vendors can use this information to redesign packaging or shipping procedures to prevent future damage.
- Incomplete or missing paperwork – The vendor may not realize that, if certain paperwork is missing, you will not be able to sell or use the material received.
- Include your warehouse bin locations on their packing slips – This will expedite your put-away process.
The best way to improve your operations, reduce your operating costs, and improve customer service is to closely monitor the problems produced by your current operations. Applying the vendor satisfaction analysis to supplier shipments is a good way to identify ways to improve your replenishment process.