Summary
For retailers, supply chain friction occurs anywhere along the purchase ordering process where something unplanned or unexpected occurs. While the concept of friction in the supply chain is impossible to avoid entirely, it does undermine the efficiency of an organization’s core business process and is something that is crucial to address. In this blog, we will examine areas of friction and mitigation strategies in three focus areas: the order process, the delivery process, and the payment process.
The inevitability and ramifications of supply chain friction
Human nature and inevitable, unintentional mistakes contribute to friction in the ordering process. Stuff happens, such as busy traffic causing missed delivery appointments, improper vendor required product tags, negotiated off-invoice deductions that are missing, for retailers the detrimental impact is substantial. Most importantly the customer experience can also be negatively impacted, and these issues also have significant revenue implications in areas like payment accuracy, taxes, and vendor contract compliance.
With the massive amount of communications and documentation data generated during the ordering process, it can be very difficult to understand where systemic issues exist and to correct them in a timely manner. As such when issues/mistakes are uncovered long after-the-fact, the review is missing key information and possibly after the orders have been closed, that it can create a lot of friction between retailers and suppliers to correct financially according to the vendor agreements. Furthermore, no company wants to have an enormous amount of money flowing through their penalty revenue line, because that indicates there are a lot of problems in their supply chain.
Friction in inventory & forecasting
In a perfect world when you are working with your vendor partners, you are operating off a mutually agreeable forecast. The Retailer has forecasted how much product they are likely to sell, and what promotion they have planned for the next 60 or 90 days. This would afford their suppliers an opportunity to plan manufacturing, trade spend, and whatever support is required. Inevitably the first possible point of friction is when orders do not align with the forecast.
For example, if your supplier anticipated 10 thousand units and set production for that, then your procurement team decides you need 30 thousand units and will also run promotions for this inventory, that throws a wrench in the process. Can your supplier increase the units and can support the promotion with the requested trade spend? These initial issues may not be damaging friction, but the scramble, paper trail and negotiations can be tedious and disruptive. It may create a situation where the inventory can for example only be delivered incrementally in three batches of 10 thousand units each, but those details are loaded into your ERP system and potentially your finance team sees the 30 thousand units, and they process a single order for one date.
Because three individual orders would effectively triple the work on both sides, so someone may combine them all into one order, and issue a delivery window covering the period to deliver the three shipments of 10 thousand without penalty, however this introduces its own complexity. Ultimately you want an open/close purchase order scenario, so once the goods arrive the tendency is to process that order and not leave it open. Traditionally referred to as “fill and kill”, any part of the order that can’t be filled gets deleted off the order instead of keeping the PO open with a back order. So in the example above the three 10 thousands units fulfilled over time, a fill-and-kill policy would receive the first 10 thousand units and then wipe out the 20 thousand that remain. In a backorder situation the purchase order would stay open until the additional 20 thousand units arrive within the delivery window, but that’s often difficult for retailers to manage, without problems. Orders that aren’t delivered On Time In Full (OTIF) will inevitably create friction in the procurement process.
Friction in negotiation & incentives
Incentive based ad-hoc negotiations can sometimes fall outside of the normal vendor agreement parameters. A supplier may be motivated to hit their quarter and offer incentives for a retailer to purchase more inventory. For example, a supplier may offer a discount on some products delivered immediately or commit to “over-and-above” co-op advertising paid the next quarter.
In this example, some of these deductions may be on-invoice reductions for one time price reductions, while co-op support will need to be prepared to act as a credit note against total accounts payable, as opposed to applied to a particular invoice. The timing of processing these incentives can be very easy to lose track of.
In cases like these, almost all the documentation being produced around these price changes, or off-invoice deductions occur within email. If not correctly recorded in your financial systems, these incentives could be missed entirely. While internal audit teams, or traditional post-audit recovery engagements attempt to locate and rectify these problems, the truth is there often far more un-structured documentation than most retailers could ever cope with. This leads to revenue either being lost entirely, or the problems that are identified have happened so far after the fact, reconciling claims take months or even years to process. That latency alone can create a tremendous amount of tension within your supplier ecosystem, imagine claiming a $25K penalty against a supplier 18 months after an initial mistake? That’s not going to be optimal for a healthy retailer/supplier relationship.
Addressing and correcting friction in the order process
While the preference for retailers would be to always get the product as they want it, when they want it, and sell it at the margin they want, the fact remains that supply chain friction will always exist to some extent.
There is an opportunity however to identify and rectify these mistakes, but ultimately any real solution needs to include corrective action. Corrective action is only appropriate if it is factually based and timely. Without those two elements it is very difficult to put effective corrective measures in place.
Ideally a retailer would apply supply chain analytics in as close to real time as possible, thereby identifying issues and benchmarking them. A Key Performance Metric (KPI) should be based around the number of issues that are occurring and to strive to reduce the number of issues over time. Ultimately this leads to a better customer experience and increased revenues.
Traditional internal audit teams and post-audit analysis services have not been well positioned to analyze the entirety of data and documentation that must be scrutinized to uncover and resolve these issues. Additionally, traditional external audit services can take an upwards of 18-months to complete, putting the goal of comprehensive and close to real time analysis far out of sight.
At Vigilant AI we are on a mission to bring supply chain analytics into the future, leveraging the latest technologies including Artificial Intelligence to analyze 100% of related data and documentation, including email, to deliver insights in as close to real time as possible. If you are looking to alleviate supply chain friction in your organization, drop us a line and let’s chat about how we can help.
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