OTIF Standards: Good for Customer, Bad for Brands?
The number one rule for any company is “the customer is always right.” Consumers drive demand which drives production. Today’s customer wants what they want when they want it and don’t particularly care if a snowstorm delayed their order.
In order to meet this demand, increasingly more companies, particularly big-box brands, are backing up their demands for suppliers to deliver product on-time in-full (OTIF) with a charge-back fee if they fail to do so. It’s not surprising to see such harsh consequences to delays and missing or damaged goods. According to McKinsey, the U.S. food retail industry loses approximately $15-20 billion in sales annually (2-3% of its total sales) because items are out of stock or unsaleable. As retailers look to reduce their costs and increase revenue, part of the onus is on shippers, carriers and others in the supply chain.
The OTIF concept is relatively new. Walmart introduced the initiative in 2017 and has increased its supplier expectations ever since. Supply Chain Dive noted that Walmart now requires all of its suppliers to deliver full truckloads within a two-day window 87% of the time, up from 85%, or face fines of 3% of the cost of goods sold.
The strategy is working. OTIF requirements and enforced consequences for failure have resulted in more shipments arriving on time and in full. When shipments arrive as expected, Walmart is able to increase in-stock levels without having to manage and pay for excess inventory. Sales increase and costs decrease, incentivizing other companies to follow suit.
Walmart’s improvements have gotten the attention of other companies like Target, Home Depot and Kraft Heinz as well. Each of these companies has its own OTIF requirements, but all implemented the requirement for the same reasons, even if it introduced new challenges. In a Supply Chain Dive article, the head of Kraft Heinz customer supply chain said they view OTIF as less of a burden because it has “benefited the organization in the long haul – mainly because it demands a data-driven approach to performance.”
As shipping timelines continue to shorten to meet demand, suppliers are having to get smarter and more innovative in how they deliver. Much of their challenge is to get visibility into their risks early enough in the planning process to change course if necessary before OTIF commitments are threatened.
More Than Timing
While products now must arrive at just the right time, timing isn’t the only measure of competence. These brands are also insisting the product is delivered exactly as ordered – nothing missing or added, nothing damaged. Why? Because every variation, delay or change in delivery creates more work, increases costs, and damages customer satisfaction.
The Wall Street Journal reported that incomplete deliveries, even if arriving on time, “are driving as many as 30% of out-of-stock readings in stores.” Items arriving earlier than expected require storage space and planning. Items arriving late mean empty shelves and frustrated customers who can be all too quick to post negative reviews and/or shift their loyalties to another brand. Damaged products can’t be sold and must be re-ordered.
The OTIF standard puts a lot of pressure on companies up and down the supply chain to comply or be left behind. They must have systems in place that facilitate this relatively new initiative and track their own performance. But things inevitably happen. Risk is everywhere. Companies have to be able to see those risks, even predict them ahead of time in order to mitigate the risks before they interrupt their ability to adhere to OTIF standards.
SupplyChainDive.com says the most common causes for OTIF misses are “pick-and-pack mistakes, transportation delays and communication issues.” Transportation delays are, perhaps, the most challenging supply chain risks to prevent. There are many variables to account for, such as weather, seasonality, carrier, distance, geography, and the expected number of stops to name just a few. As a result, much of the risk revolves around factors that are often unpredictable and quickly changing.
OTIF Requires Real-Time Visibility
According to Gartner’s “Is There A Business Case for Supply Chain Visibility?”, “Shippers who embrace supply chain visibility solutions can expect up to 10% increase in ‘The Perfect Order’ performance metric,” with the “Perfect Order” being OTIF delivery. But as an example, how can shippers have certainty about an ever-changing risk factor like the weather and natural disasters?
These types of risks are not only possible, they are inevitable. Forrester says. “Natural disasters and severe weather can fuel just as much manufacturing disruption as pandemics. Climate change will create endless obstacles for companies to navigate, yet firms continue to claim that there is no way to mitigate the risk. Climate change is happening now and ignorance is no longer an excuse, so what is your firm doing to manage risk?”
Suppliers, shippers, and LSPs all require real-time visibility into the supply chain to identify potential risks that could impact their ability to deliver the right product at the right time. They must be able to continually monitor the real-time location of each shipment along each leg of the journey to determine if weather or climate issues may impact its status. The earlier a company can identify a potential risk to OTIF delivery, the sooner they can make alternative plans before supply disruptions occur.
The entire supply chain must be efficient, accurate and running like a well-oiled machine. This is often easier said than done. How can suppliers adhere to such strict OTIF expectations so as not to lose money and customers? How can they possibly predict and mitigate weather and climate risks to their delivery execution? How can they set proper expectations? Material Handling & Logistics says digital technology is the answer, saying, “If companies are going to embrace new business models, or digitally enable older ones, they are going to need a modern, capable supply chain to do it.”
Taming the Unpredictable
Suppliers aren’t the only ones on the hook. Shippers and third-party logistics service providers (LSPs) carry the same burden. It’s their responsibility to get the loaded freight to the intended destination on time, despite bad weather, climate extremes or infrastructure issues. One of the busiest delivery seasons happens to be at the same time as some of the worst winter weather conditions. Suppliers and shippers can’t allow the weather or other similar risks to delay their shipments.
The weather has incredible impacts on freight. According to a study by the U.S. Department of Transportation Federal Highway Administration, weather-related delay costs the industry $billion to $9 billion annually. Here’s how different weather events directly impact mobility:
- Light rain or snow can reduce average speed by 3 to 13%
- Heavy rain can decrease average speed by 3 to 16%
- Heavy snow can decrease freeway speeds by 5 to 40%
- Low visibility can cause speed reductions of 10 to 12%
Further, 23% of the non-recurrent highway delays across the nation are due to snow, ice and fog. These statistics have a significant impact on OTIF commitments. Often, companies feel ill-equipped or incapable of doing anything about it. Weather and climate are unpredictable and uncontrollable, right? Not exactly.
While companies may feel as though they are at the mercy of these and other variables, technology is giving them the ability to dramatically improve their capabilities. The digital transformation is only the beginning. Artificial intelligence, advanced analytics and predictive analytics have changed the game entirely.
Building Confidence in ETAs
The key to OTIF deliveries is visibility, but the benefit of having such insight is the ability to build confidence in ETAs and avoid making commitments that have a low chance of being met. ETAs should never be a guess or rough estimate. The customer defines “expected” time of arrival as a hard date they can plan on. It’s up to the shipper and carrier to defy weather or other risk factors and deliver as promised.
Riskpulse’s OTIF program is helping suppliers, shippers and logistics companies provide more accurate ETAs using a new API that will produce probability scores for an ETA. Combining accurate, real-time and predicted data across over 60 factors, such as infrastructure outages, natural disasters, social hazards, and equipment type, companies have a more comprehensive view of any threats to their OTIF commitment. Now, not only will users be able to set the ETA at 6:18 P.M., for instance, but they can better understand the probability of that actually happening. Perhaps there is a 40% chance the shipment is later than 6:18, a 55% chance it is earlier, and a 5% chance it is right on time within 10 minutes.
The real power comes when ETAs are accompanied by an accuracy rating. Using traditional methods, companies can do little more than guess at ETAs. If weather or other events catch them by surprise, those original ETAs are either missed entirely or are updated as the company learns of the delays. There’s not much that can be done to change course to better meet the ETA commitments.
With the software, however, companies can know which ETA they should bet on and which are less likely to be accurate. Even better, they can have this data before the shipment ever leaves the dock. If the shipment meets the company’s risk threshold, the predictive intelligence kicks in to recommend the best course of action. Mitigation efforts can begin well enough ahead of the shipment date to actually make a difference. ETAs are less likely to be missed because the risks were identified earlier in the planning phase.
When your customers are demanding precision in OTIF deliveries and even mandating up to a 3% fee when you fail, you must deliver it. You may have an ETA and you and the carrier promise the product will get there at that time, but how certain are either of you that will actually happen? With the Riskpulse, shippers can get a better read on that uncertainty before, during or after making a commitment. This gives you the ability to change or optimize scheduling, lanes or modes of transportation before a disruption occurs.
As a receiver of goods, how beneficial would it be to know that certain ETA promises have a higher chance of missing their window? Even with the penalties you put into place to motivate suppliers and shipper to adhere to your OTIF standards, you know not every company will be able to make their stated ETAs. Having the Riskpulse ETA API enables receivers to plan on the most probable scenario given all of the risk factors. The likelihood of hitting a particular delivery time and date is no longer based on an “estimate” but actual data that is much more reliable.
Don’t Ship in The Dark
No matter where your company lies along the supply chain, access to real-time, reliable data is the only way to effectively estimate delivery times and stick to each customer’s OTIF requirements. By viewing ETA probability scores, you can quickly determine what needs to be done next.
Whether it’s making a decision on how to mitigate an impending weather risk or setting the right expectations with the customer, you can be more proactive and confident in your actions. Data-driven insights justify your decisions internally but externally as well. With graphic reports, you can communicate with your customers if necessary to show them exactly why you made the decisions you did.
Using solutions like Riskpulse, you can see where your greatest risks to OTIF deliveries lie, the probability of those happening, and how they might affect ETAs. ETAs are no longer a shot in the dark, but a promise you have a much better chance of keeping. Customers have confidence they will receive your deliveries on time and full and can plan accordingly. The confidence you can give your customers goes a long way in setting your company apart from the rest and establishing it as a preferred vendor for years to come.
While not all risks are completely avoidable, having the best possible data as early as possible gives you a little wiggle room. Instead of being reactive and cleaning up the damage after it happens (and paying fines), you can be proactive and take action to avoid risk factors disrupting your supply chain altogether. OTIF is less of a burden and instead offers an opportunity to rise to the top. Using actionable, predictive analytics to drive business decisions becomes a powerful differentiator and competitive advantage as customer demand will likely continue to apply pressure to product-driven companies.