Monday, September 21, 2009

Who cares about OTIF?

There used to be a heavy importance placed on supplier delivery, especially using the on-time and in-full (OTIF) metric in business-to-business (B2B) sales. About 15-20 years ago, it went away. The important metric was shortages (i.e. making sure there were no shortages). Even while shortages was gaining in importance, Material Requirements Planning (MRP) systems still scheduled supplier's demand and only measured OTIF.

OTIF is gaining in importance again and I fear that it's going to drive more waste (wasted time, effort and money) within business activities. Here's why:

MRP systems show a demand at the beginning of the month for 1,000 parts, as an example. The only metric being used is OTIF. Therefore, the supplier is required to ship 1,000 parts to the customer by the first of the month.

First of all, the requirement at the beginning of the month is just one that the supplier has gotten. Other customers also want OTIF product at the beginning of the month. This can create the typical "hockey stick" pattern of shipments (i.e. not much in the beginning to mid-month, and then almost all ships at the end of the month). If the supplier has planned for this, then this company is expending lots of capacity effort to make it happen, perhaps over-time hours, perhaps inbound expedited freight. As the deadlines loom, outbound expedited freight may occur to ensure the order is delivered on time.

If any hiccups occur, there are multiple conversations between the customer and the supplier. Effort is expended; analysis done. Communication happens throughout both organizations to keep everyone abreast of the situation. Relationships are strained.

What happens when the parts are delivered OTIF? Most of them will sit on the shelf for several weeks. Inventory levels are inflated. Cash flows are strained to pay for all this material at once. Suppliers won't believe the customer really needs the parts on any particular date if they ever find out that they're not being used.

It would be better to find ways to schedule and release demand to the suppliers at the rate the customer is going to consume them. However, some MRP systems can't handle this. The other option: ignore OTIF. Give the suppliers the real need based on when the customer's use. Hold them accountable for the shortage. Never go to the shelf for a needed part and it's not there.

It's harder to measure this, but it reduces waste and increases the trust within relationships internally and externally to the organization. Forget the OTIF metric. Do what's right.

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