OTIF ā€“ Decoding a new metric, driving the supply chain partners towards better chain operations

The inception of the e-commerce industry has enabled customers to purchase products at their desired location and time with a simple touch on a device. This has led to a significant shift in the purchasing habit of the consumer from physical stores to online stores. As a result, E-Commerce has become a vital aspect of the global retail landscape in recent years. Like many other businesses, the retail sector has changed dramatically since the introduction of the internet due to the impact of COVID-19. According to Forbes, nearly 36% of the U.S. consumers buy retail goods online, compared to 29% doing so earlier when most of the brick-and-motor stores were closed.

The pandemic has accelerated the rivalry between the physical and online stores at unexpected rates. It has become difficult for brick and motor stores to operate efficiently, considering the uncertainty of the demand for the product. Consumers expect the stores to have the shelf of the products be full so that they never have to come back empty-handed whenever they go to those stores. Mckinsey reports that the US food retail industry loses an estimated $15-20 billion in sales every year because items are out of stock or otherwise unsalable. This poses a massive challenge for the stores to maintain enough stock on the shelf which can cater to the customer's demand and at the same time keeps the cost low to be profitable and efficient.

It's becoming harder for organizations to achieve their supply chain goals or targets while cutting down the costs due to the vast variability of the products, demand for those products, the distribution channels, and different promotional offers that lure the customers into buying products. Retailers have understood the importance of having a digital presence in the digitally connected world; however, this isn't as easy as it seems. "The industry previously reported that roughly 3% of transactions occurred online pre-pandemic, but witnessed a massive 76.2% growth in 2020."

In online buying, around 49% of buyers pick same-day or next-day delivery. Moreover, if physical retailers want to keep customers, they must ensure that the proper quantity of products is available at the right moment on the shelf. All of these have significantly increased the pressure on the supply chain industry to ensure that there is a proper flow of the products at the right place and at the right time with the minimum cost possible. This has led to introducing a new metric in the supply chain industry – "OTIF." 'On-Time, in-full" is a more rigorous effort that measures the extent to which shipments are delivered to their destination according to both the quantity and schedule specified on order.

In theory, this metric (OTIF) should act as a mechanism to align the objectives of retailers and manufacturers. CPG firms' supply chains that fail to meet their OTIF goals may suffer significant penalties based on the cost of goods sold. A supply chain toolbox with a 360° perspective of the supply chain and end-to-end visibility is the need of the hour to avoid challenges and misses. In reality, there is no standard definition of OTIF yet, so it all depends on how different parties involved in the supply chain perceive it. This might pose a significant risk for any and every party involved in the supply chain.

That might not sound like a big issue; however, if we look at it from a granular level, we realize that it can disrupt chain operations. Small things like the time of delivery depend on the time promised by the manufacturer or the time asked by the retailer? Can the delivery be done earlier, or does it have to be at the exact time specified or in a broad time range? How should the in-time aspect be looked at? Does it measure on the level of orders complete or on the product, or is it customer from the order to order based on the individual case?

It becomes imperative to have answers to all of these questions beforehand in order to ensure a smooth chain operation without any complexities. Traditionally, to avoid delays in the chain operation, companies levied a penalty on the deliveries that were not made on time, which decreased the number of deliveries being late; however, it brought another potential risk of inefficiency. For instance, about 25% of deliveries arrive more than two hours before the scheduled time, according to Mckinsey. This disrupts the chain operations; unloading before the pre-decided time makes it difficult for the partner, and on the other hand, waiting for the turn to unload the delivery wastes time for the delivery partner. 

 

Why OTIF metric?

Mckinsey & Trading Partner Alliance (TPA) surveyed around 15 major retailers and manufacturers in North America. 92% of the respondents agreed to the fact that OTIF standards would add value to the existing supply chains. They also agreed that having a universal definition of OTIF would significantly reduce confusion and help supply chain partners to be on the same pace to achieve better collaboration. In my opinion, this metric can be of benefit in two significant ways:

  • Better Clarity among parties

Considering the fact that there is no universal definition of OTIF, different players see it in different ways. This causes a gap among the players engaging in businesses, which eventually leads to various issues in the chain. However, when a common viewpoint for this metric exists, it eradicates the grounds for problems to emerge in any form.

  • Eliminating different chain complexities

It becomes easy to coordinate when you have a universal benchmark that sets a tone of the kind of expectations from the OTIF metric. When everyone speaks the same language, there's no need to have additional resources or people looking behind what can otherwise function on its own.

 

How does this 'OTIF' metric make a difference?

There is no standard definition to this metric, so whatever is agreed on between the buyer and the seller while making a transaction defines the overall idea about this metric. However, we can have a basic understanding concept behind how it impacts the chain operations? Usually, OTIF will be about the seller delivering the goods in full quantity as ordered by the buyer in the specific time period as pre-decided. Based on the delivery of the goods, the buying party can give out an OTIF score to the party which delivered the goods. This score is usually for a month's time frame, which shows how well a delivery partner can deliver the required goods. Having a good score improves the credibility of the supplier in the market; thus, they can get more business.

For instance, party 'A' places an order of 1000 bottles to party 'B,' who is a manufacturer of quality bottles. They both agree that the order should be delivered within the next ten days from the date of the order placed. Assuming that the order was placed on 1st July, ideally, the party 'B' has to make the delivery before 20th July. If they deliver it after 21st July, then party 'A' can give a low score (say 40), and if vice versa, they get a high score (say 80). Similarly, all the scores combined from various deliveries, at the end of the month party 'B' will have one combined score which will show how good their delivery system is or how efficiently they can deliver goods?

While the score acts as some motivating factor to the supplier, it can often be manipulated; hence, having a penalty for not meeting the delivery agreements is a must. For instance, Walmart – an American multinational retail corporation that operates a chain of hypermarkets, discount department stores, and grocery stores, has a strict penalty for non-compliant deliveries. Walmart institutes a fine of 3 percent of the total cost of goods sold for all the deliveries made outside of the agreed time frame. Depending upon the size of the order, this can be thousands of dollars. This can affect the supplier badly since most of the time, the order placed are large in quantity.

 

How can you achieve the metric – OTIF?

The first step you should take to leverage this metric is to set a universal understanding of it. Once this is achieved, half of your job is done. After doing so, you can do the following to ensure you make the most of this metric.

  • Understand the Retail requirements – It becomes vital to understand the requirements of the specific retail player with whom you engage in a business. Every player has their own needs and policies which help them function properly. Maybe on time is literally at the specified time for one, and on time may be any time before the agreed time period for someone else.
  • Knowing the appointment scheduling – This is critical because it may become a reason for your delivery being rejected at times. Every player has their own margin of timely delivery. Some may accept the delivery if you miss the timing by say +/- one hour, but some may reject right away.
  • Sync production & transportation – If you want to deliver goods on time, you have to produce them accordingly. Hence, your production cycle should be in sync with the delivery cycle to ensure the right amount of goods are delivered as per the order.
  • Crisp Communication – In case you get an order which you might not be able to cater to due to some reasons, then you should communicate it with your buyer there and then so as to avoid any further consequences. Once the final order is placed, it might become difficult to change any aspect of it.
  • Configure Strong network – The entire process of delivery should be optimized and well planned to achieve the best possible delivery. If your logistics process is not well planned, it might cause several issues. For example, you may be able to deliver on time, but it might have imposed a high cost on your side, then it's futile.
  • Have a minimum order value – You are in a competitive market where providing quality services is not enough; you need to be profitable to survive and compete at the same time. Therefore, it is essential to have a minimum quantity of orders to ensure some cash flow for you.
  • Leverage technologies – One must always use the latest technologies to be efficient and effective in providing services. This not only makes your work easy in several ways but, more importantly, reduces the costs involved in the process.
  • Use data to draw insights – Data is the new oil. If you can use your data to draw meaningful conclusions and apply some of them to your existing process, it will make your process much better, and you will be able to become the market leader in the long run.
  • Make informed judgments – Always weigh the benefits and drawbacks of a potential decision you intend to make. This will help you to make the most appropriate decisions, which will optimize your whole process only for the better.

 

It's now time to elevate your supply chain operation with this metric – OTIF, which has the potential to add and create value for your chain. With all this knowledge, I am sure you will undoubtedly bring a positive change which will enable you to remain competitive in the market and probably make you the market leader in the long run. So, let's change the supply chain industry by having solid metrics.

 

By Pranesh Patel

Strategic Consultant