How to Improve an EMS Suppliers On Time Delivery

Late deliveries are so frustrating. You asked when they could deliver and gave them a PO based on their own commit date. What’s the problem???

Let’s dive into the problem and see what you can do about it.

Understanding On Time Delivery (OTD)

On-time delivery (OTD) is one of contract manufacturing's most common measurements, but we rarely talk about how difficult it is to define and measure. 

Here's a quick guide to defining and measuring OTD.

Basic Definition

OTD rarely refers to a specific date; it usually refers to a range of dates. 

In most companies, OTD refers to a range of dates defined as X days before (early) and Y days after (late) the due date. This is called the OTD Window.

A typical OTD window is 5 days early, 0 days late. This is expressed as -5+0. For example, if an item is due on June 1, it would be considered on time if it arrives on any day between May 27 and June 1. 

This concept of an OTD window is embedded in almost all modern ERP/MRP systems.

OTD Window Factors

The two main factors that influence the OTD window are production line requirements and cash flow. 

If a particular delivery is expensive, it may be planned for delivery very close to the production need date so it cannot be late. Since it is expensive, it cannot be early, so a tight window is appropriate. 

If an item is inexpensive and planned in bulk (e.g., floor stock of screws), it can arrive within a very wide window and still be considered on time. 

The key is that whatever your OTD window is, it must be clearly understood by your supply base.

Windows by Commodity Class 

Companies often classify components by value, commonly referred to as A items (high cost), B items (medium cost), or C items (low cost).

If your system has the capability, you can set the OTD window by commodity class.

Common windows are -5+0 for A items, -5+1 for B items, and -10+5 for C items.

It is critical to note that these windows must be coordinated with the planning lead times in ERP. You cannot have a +5 day window for C items if the ERP is driving C items to arrive on the day of need.

Windows for Pull Systems

Pull systems include Kanban, Min/max, bin replacements, etc. Most associated with variants of Just-in-Time (JIT) programs, pull systems are any approach that involves delivery triggered by an event. 

By contrast, in traditional push systems, delivery is triggered by a PO date. 

We do not advocate the use of OTD for pull systems; the appropriate performance measurement approach is stock outs. However, due to limitations in ERP environments, companies often must try to apply an OTD metric to pull systems. 

In this situation, we suggest using blanket POs for annual, quarterly, monthly, or even weekly quantities. 

Set your early window to equal the performance period of the blanket. As a starting point, you might choose to issue blanket PO line items for one month’s requirements. 

In this case, set the early window to -31 and the late window to 0. If you are experiencing stock outs, you will need to set the blanket window to one week. If there are no stock outs, you can loosen the blanket to one quarter.

Measuring OTD

Defining OTD is the starting point, but over time measuring OTD is the real challenge.

Reliable OTD statistics that everyone, internal and external to your organization, can count on are the only stats worth tracking. 

Here are some of the challenges:

Working Days vs. Calendar Days

This is one of the most common misunderstandings between customer and supplier. 

Does 5 days early include weekends? Holidays? 

It doesn't really matter which method you choose, if the suppliers understand. 

That said, we recommend calendar days: it is intuitive, easy to understand, and most widely adopted. 

Whichever you choose, make sure your ERP is aligned. Often the working day or calendar day decision will affect the entire ERP planning module.

Ship Date vs. Dock Date

Another basic misunderstanding is, does the date used to measure OTD refer to the date the item is shipped, or the date the item is received? 

It's best practice to use the dock date, the date the item is received. This is the most intuitive and the most widely used. 

The supplier should be accountable to consider transit times when determining what ship date they will need to make to supply the material within your OTD window.

Required Date vs. Promise Date

A required date is the delivery date you need. 

A promise date is the date the supplier committed to meet. 

The promise date is best practice, and by far the most widely used. It is rarely fair to hold a supplier to a requirement they have not agreed to.

Using required dates for OTD measurement is appropriate when certain agreements are in place, for example, vendor stocking programs or guaranteed lead times that were pre-negotiated.

Original Promise Date vs. Revised Promise Date

The promise date will often be altered at some point by either you or the supplier. 

If you request the change (a pull-in or push-out), then you should change the promise date. 

If the supplier requests the change, you should accept it if the reason is beyond the supplier's control in your judgement.

You might also accept the change if your request date was unnecessarily aggressive. Perhaps you needed it in 60 days, and the supplier said they could deliver in 30 days if they really pushed it, and turns out they will be 2 days late. Do you really want to tarnish the supplier for this?

Line Item, Percent Complete, or PPM?

Calculating OTD by completed line item is the standard.

Sometimes it’s appropriate to consider delivery percentage. If 99 out of 100 were delivered on time, and 1 was delivered late, do you really want to score the entire line item as late?

Parts per million (PPM) is one alternate approach. To use PPM, you sum the received unit quantity delivered late, and the total unit quantity of all receipts. Then divide lates by the total and multiply by 10,000. 

Note: PPM is usually used to describe the number that is late, not the number on time.   

Your Data vs. Supplier Data

Often the supplier's measurement of OTD varies from yours. 

All the factors above can contribute to such a difference. The best thing that can be done is to periodically reconcile each other's measurements. 

We suggest this should be done quarterly, even more frequently if large differences persist.

Through careful consideration of the above factors, you can ensure an accurate OTD calculation that is a helpful metric for both you and your suppliers.

What is considered poor OTD performance?

This is a very subjective question, and answers can range all over the board, but these are reasonable descriptions to start with:

Excellent – 95% and up

Good – 80% - 90%

Not Good – 60% - 80%

Bad – below 60%

Remember OTD percentages are often based on small numbers.

 Consider a supplier who makes 12 deliveries in a month. If they deliver 11 of 12 on time, the OTD performance is 91%. Delivering 10 of 12 on time is 83%.

What to do when OTD is bad

The first thing to understand is that you have a relationship problem and approach it that way. 

Today every EMS company is very capable, the question is why aren’t they executing for you?

Verify first

When your data shows a supplier below 60% OTD the first thing to do is ask what the supplier thinks its OTD performance is. 

If there is large gap, and there very often is, the first thing to do is close this gap so you have numbers you both agree on.

Do you value this supplier?

You will need to take leadership internally and develop a consensus about your company’s intentions with this supplier. 

How do Quality and Manufacturing feel? At below 60% OTD somebody is probably pretty upset with this supplier. 

There are many factors to consider but the bottom line is you need consensus on whether you want to retain the supplier or disengage, do not go this alone. 

Does this supplier value you?

I’m going to share some hard truths here. If your EMS company is underperforming on OTD they probably don’t value you much as a customer.

There are several reasons they might fall out of love with you, but it doesn’t really matter. 

The challenge for you is to command as much support as possible given your spend.

Their interest in you will be determined by your spend relative to the size of their operation. Here’s a rough guide based on the percentage you are of their operations revenue:

• Less than 5% you are not important. Please and thank you are your most important tools 😊.
• At 5-10% they will prefer to retain you, especially if you have growth potential and they are slow. You can be professional but if you are overbearing you may become more of a hassle than you’re worth.
• At 10-20% of their revenue you are a core customer they rely on financially. You are more or less equally important to each other, and you can demand the attention you deserve.
• If you are 20% and above you absolutely should not have unexplained OTD problems, and if you do there is a serious operational problem.

Start with a Review Meeting

Schedule a meeting with the supplier, face-to-face, is preferred and should include as much senior management at the supplier as possible. 

Ask the supplier to be prepared with their plan to improve OTD. You should bring your performance data to the review, but at this point you should both agree on the performance level so extensive review is not necessary and likely counterproductive. 

The purpose of this meeting is to plan a recovery, the tone should be positive. 

It is essential that you convey the importance of the relationship and the willingness of you and your company to contribute to improvement.

Also let them know that your company’s expectation of them is trust but verify.

Emphasize potential business growth if you can, avoid threats. They know the consequences already.

The Root Cause

It is polite and professional to ask the EMS company to articulate the root cause. 

Whatever they say, the core problem is materials, and this is what you will drill down on. 

Might be a planning problem, might be a purchasing problem, might be something else, but what is happening with materials is ultimately what you need to figure out.

Purchasing Workflow

Try to ascertain their process for executing ERP buy actions. 

Most important is do they confirm price & delivery before placing the order with suppliers, or do they send purchase orders to the default supplier and wait for confirmation? 

This understanding will help you later.

The Shortage Report

Request, and if necessary, demand, a shortage report. Your focus will be on reviewing the shortage report with them and understanding why each item is short, what is being done, and when it will be cleared. 

This is intrusive, tedious, and generally awful but must be done.

Start with weekly reviews and if performance does not improve within a month you will need to move to daily reviews.

Look for certain telltale signs to reveal what is really happening at the EMS. 

• No date – this means a PO for the material has not been placed. There are lots of potential reasons, including:
  • Problem with order entry or something similar with Program Manager.
  • Purchasing overwhelmed
  • Credit problem with their supplier(s) preventing new order entry
  • Lack of cooperation from their supplier(s) for some reason, if you have source controlled this item then you are partially responsible too.
• Changing dates – Delivery data reported in the shortage meetings constantly moving out without explanation is not a good sign, it could mean:
  • You are being given dates just to get you to go away.
  • Someone is providing bad dates either through negligence or improper training.
• Unsatisfactory dates – The item is needed now, and the EMS says it won’t arrive until some days or weeks later. This is the most common situation, it means
  • There is a legitimate lead time/delivery issue, and the EMS has handled the situation as best as can be expected.
  • They (or their suppliers) are giving you a bad date that will later be pushed out.

What You Should Do

Since you explained to the supplier in the beginning that your company requires you to trust but verify, explain now that you will be looking at their answers and verifying. 

Pro Tip

You should never be able to improve on the answers your EMS company gives you regarding materials.

You are outsourcing to them because of their expertise. Unless really innovative or unusual, if you find a better solution they should be embarrassed.

Select some or all of the items and verify their answers. Use Octopart to check availability. Call the suppliers (usually distributors) yourself. 

Here is the reality of what you can do based on your spend:

Sub 5% of EMS revenue

Provide your feedback in the spirit of lending a helping hand and try to build positive empathy so they pay more attention to you. 

The reality is if you push too hard your service level will go down.

5% - 10% of EMS revenue

Read the temperature of the relationship and be more insistent with your feedback. Start asking for commitments.

The attitude of the employees will reflect the attitude of management. If management is getting irritated it will show this way.

Best not to push so hard the relationship deteriorates further and their performance gets worse.

10% - 20% of EMS revenue

Absolutely insist on resolution. 

Demand meetings with them weekly, then daily, then twice a day, until the shortage report is under control to your satisfaction. 

If they cannot get the situation under control within 30 days, 60 at the most, there is an underlying problem at the EMS.

20% or more of EMS revenue

If you are greater than 20% and have unexplained or unresolved OTD issues, there is a real problem at the EMS that has nothing to do with you. 

Telltale signs of turmoil are high turnover, headcount reductions, and credit hold at their suppliers.

 In this case you need to have a very direct conversation with the General Manager (or equivalent) and establish a timeline for stabilizing their operation. 

If they cannot stabilize within 90 days you need to consider switching suppliers. 

Concluding thoughts

We started out wondering why EMS suppliers can’t just deliver when they said they would. 

There’s nothing wrong with thinking this way, but it is a naïve viewpoint and you can distinguish yourself amongst your procurement professional piers by viewing the problem as a relationship issue that you can positively influence instead of a contractual problem you can’t do anything about.