NPI Supply Chain Craft

Practical Techniques for Handling Late Purchase Order Deliveries.

The final post in this series will cover other tactics that Buyers (whether NPI or Production) could use for late purchase order deliveries or schedules. I consider some of these as last resorts because they can or will incur unplanned cost to the program or your company.

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Quick Links

• Part 1: Detailed Status & Causes
• Part 2: Recovery Plan & Solutions
• Part 3: Main Tactic – Supplier Monitoring & Visits
• Part 4: Tactics specific to NPI & R&D Programs
• Part 5: Miscellaneous Tactics

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Source Inspections

Instead of traditional post-receipt parts inspections, companies can also send a Quality Inspector to do partial or complete parts inspections at the supplier’s facility before shipment. The beauty of this is that it can speed through the receiving inspection queue or the inspection process itself much quicker. In the case of a late part delivery or schedule, source inspections can be used tactically to reduce or recover lead time.

The tactic’s goal is not only reduce overall lead time but to also reduce the risk of overall added lead time due to quality issues. The first is to catch potential high-risk nonconformance (physical or paper) before the parts leave the supplier’s building. If risk is realized, you have prevented days or weeks of delay as a result of the MRB and RTV (Return-To-Vendor ) process. If the parts or feature pass source inspection, you’re indirectly chipping away at upcoming receiving inspection time. If a full successful source inspection is done, you’re possibly removing receiving inspection and queue time altogether.

With exceptions, certain conditions (some obvious) should be in place before using this option. The part on order is custom (i.e. must be inspected for conformance to a drawing created by your Engineers). Supplier’s facility is within intraday driving proximity. Supplier has inspection resources (personnel and equipment) in order to assist. Your Quality Inspector is available for the day and time scheduled. The inspection can be scheduled within a reasonable time tolerance without extending the supplier’s ship date. (After all, the point is to reduce overall lead time needed to get the parts into stock).

Situations where using this tactic makes sense:

• Applicable to manufactured items, the part may not not meet certain drawing requirements due to high risk features such as extremely tight tolerances, complex geometry, or just critical dimensions.
• The supplier or your Engineer advises you of specific drawing nonconformance risks.
• Supplier has a repetitive history of certain nonconformance issues (like application of coatings that are too thick or thin).
• Your company has a large backlog of orders awaiting receiving or inspection.

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Expedite Fee

If the supplier offers it, an expedite fee obligates faster-than-standard lead time completion. The expectation is that your order moves to the front of the line or after hours time and effort will be applied in order to deliver quicker. Contractual obligations aside, a customer should NEVER have to pay expedite fees on a late order if the supplier is 100% at fault. It’s the principle of the thing and they should do everything reasonable to make good on their mistake.

If your company bears some responsibility for the late order, conversely, payment of an expedite fee could be justifiable. Maybe there was a drawing change mid-processing. Maybe the supplier’s quote covered standard outside processing lead times only. Maybe the Buyer submitted the purchase order within quoted lead time (heaven forbid!). Maybe supplier’s processing was delayed directly or indirectly by an “Act of God” event. Maybe the part has complex geometry and both parties knew prior to order placement that there were potential manufacturing risks.

Keep in mind the following if an expedite fee is approved.

• If they don’t bring it up, examine each remaining process vs their schedule yourself and ask the supplier if expedite or overtime is an option.
• Make sure the program or company is willing to cover the cost. Company procedures probably require expedite fee approvals.
• Get a breakdown on a proposed fee. How exactly would it improve delivery? How many days’ reduction? If the supplier quotes $3,000 to open on Saturday and work on your order, what does that amount cover? How many labor hours and which labor roles? The amount needs to be reasonable for the outcome promised.
• Speaking of promises, a Change P.O. should be issued to and accepted by the supplier explaining expedite fee payment conditions. This should include the number of days’ lead time reduction, the new promise date, a cancellation option for non-performance, and reduced payment details for partial performance.

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Empowered Supplier Insider

I define a Supplier Insider as a Contact with whom you’ve established not only a good business relationship but also a likeable rapport. This could be a long-term connection but it could also be someone you just met via telephone. Many times in my past, it would be a Customer Service Rep or Engineer. Other times, it would be a Floor Supervisor, a Quality Manager, or a Test Technician. They are people in a position to effect resolution to whatever issue may be holding up or delaying your order.

They are also empowered in some way to temporarily act as an insider champion on your behalf. They can be instrumental in explaining, removing, or overcoming any kind of issue that is delaying your late order. They can also be a key person to expedite your order (without added cost).

Look for these positive types of power in the person you deal with.

• Hierarchical. Recognizable by the person’s title and role within the company. I’m talking about the President, executives, directors, managers, etc., with the authority to reprioritize work.
• Expert. The person is highly skilled and educated in the field or situation where technical influence is needed to resolve a problem.
• Informational. The person is very knowledgeable about a situation or process factors delaying an order and all possible paths to removing the delay.
• Connections. The person has good networking skills in their organization and knows whom to contact and persuade to resolve a problem.

There are two other types of power that will help you develop good supplier contacts: Charismatic and Moral. Personal charisma tends to persuasively engage listeners. Confident use of it exudes positivity, amusement, and genuine interest in others. Meanwhile, moral strength inspires with words and actions based on honesty, fairness, and trustworthiness. Both qualities will get you better results in supply chain activities involving collaboration or negotiation.

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Mutual Opportunities/Jeopardy Leverage

When you can persuade your supplier of the big picture importance, they will be more motivated to improve a moved-out schedule as much as possible. Yes, giving them business and a purchase order with contractual obligations should be sufficient for on-time delivery. But remember that a typical supplier will have a backlog in which your revenue represents only a percentage. Personnel there will work on a variety of customer orders, not just yours. How to get them to consistently focus on recovering your late orders, day-by-day?

A powerful approach is to make the supplier understand that, if the late order in question prevents your company from meeting its deliverable goals to its own customers, then “we all lose”. If the supplier recovers its schedule, however, and your company succeeds on delivery, then “we all win”. Common consequences could be gain or loss of future business.

When applying this leverage, enlist the help of those most influential on the specialists and technicians involved: your supplier’s Leadership and/or Drivers (meaning those who run the show in the background, maybe your Contact or someone above them). Your goal is to motivate the supplier’s “Movers and Shakers” to guide daily movement on your order until shipment without you or your company’s need to continually follow up.

Here are some scenarios where this tactic may be best suited.

• The supplier’s late delivery will have a definite effect of preventing on time delivery of your final product to the customer.
• Your Executives or Managers can back you or appeal to the supplier’s equivalent authorities themselves.
• The stakes are high: definite or potential loss of high value or long-term current, follow-on, or new business. Try to estimate in dollars, percentage, or time the amount of business the supplier could lose and let them know.
• Your company may be hit with financial penalties per its contract with your customer. Penalties that you may have to pass onto the supplier.

If there will never be a re-order of the late product regardless of circumstances, then this tactic may be inappropriate and I do NOT condone lying or overinflating mutual overall consequences of late shipment.

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Dual Sourcing

Dual sourcing is procurement of the same item from another supplier. In context of late orders, the goal is to eliminate or decrease the risk of not having critical-schedule parts on time regardless from where they come. It works best for off-the-shelf parts, custom parts with low or nil manufacturing risks, or certain outside services. Just hinting to the late supplier that you may have to go elsewhere for the parts might spur them to work harder on earlier shipment. Due to potential unwanted side effects, it should be considered an emergency option. Always ask, is it really worth the extra time, internal associate involvement, and possible material cost to pursue this option?

Presumably, the first place you’ll look for alternate sources will be quotes from the RFQ phase (which led to P.O. submittal to the original supplier) or the Estimating phase (initiated after receipt of a Customer’s RFP). The next best fallback is to obtain new quotes from your Approved Supplier List (ASL). Finally, you can resort to online searching and then purchase through Brokers or Distributors on your ASL.

There are drawbacks to this tactic but they do have countermeasures.

• 2nd Supplier Failure. To help prevent yet another late delivery by a replacement supplier, double check lead time and their manufacturing plan (if applicable). Something may have changed since the their quote date. Go over the processes and subcomponents involved, especially ones that contributed to the late order with your current supplier. Make sure the second supplier can avoid or handle the problem better it reoccurs.

• P.O. Admin Delays. Finding an alternate source with faster delivery is pointless if it is counteracted by lengthy administrative lead time to place the new purchase order. Calculate a deadline by which a P.O. must be submitted to make the effort worthwhile. Inform required Approvers (i.e. Management, Quality, Program Manager) of the pending urgency and ask if they’ll support speedy processing. Be prepared to answer address concerns, such as the current order status and resolution to surplus material receipt/cost.

• Surplus Cost. Your company might have to absorb unplanned cost in the form of a cancellation fee or extra parts. Depending on the commodity and time after P.O. issuance, though, cancellation may be waived or non-applicable. Also, sub-par performance may demand that the supplier eat costs incurred; check your P.O. terms and conditions. On the other hand, there may be benefits to letting the original order go through. Especially in NPI projects, it may be wise to have surplus of particular components that may fail in development testing. Extra commonly used material might also be usable for other anticipated customer orders.

• Surplus Inventory. Avoid a situation where surplus parts will likely sit in company inventory “forever” and just add to carrying costs until they’re finally scrapped. There might be value in using the excess parts for R&D purposes or receiving just the raw material (such as metal for your internal machine shop, if applicable). If supplier compensation is ethically or legally required, it might be better to just pay a cancellation fee and be done with it.

• Damaged Supplier Relations. Cancelling an order with a supplier can send a negative message, depending on the timing, dollar value, reason for lateness, and the type of relationship. In a growing partnership, for example, cancelling and order and going to a competitor could be seen as insulting and financially harmful. Communicate diplomatically with a good supplier and give as much opportunity as possible for them to recover. Otherwise, it’s commonplace to cancel orders of product that is easily restocked or resold at companies like McMaster-Carr or Digi-Key Electronics.

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Customer Leverage

For this topic, I’m referring to your company’s customer. Specifically, it is the customer awaiting your company’s product that won’t ship on time because your supplier is late to ship a key component. It’s not a good look to appeal to your customer for assistance on managing one’s own supplier. Your supply chain department’s competency will be questioned. But, as the saying goes, desperate times call for desperate measures. Besides, if done right, unexpected long-term benefits can happen.

How to leverage their assistance? As a Buyer, you’ll typically never get involved with customer contacts. When a parts shortage causes a major schedule impact and/or explodes into high visibility beyond your department, don’t be surprised if you find yourself pulled in directly or indirectly into customer communications. This could be through emails, telecons/videocons, or meetings. If suggestions or offers of “help” come up, seriously consider those that truly do leverage your customer’s influence and are not just the customer doing your or company’s job.

Certain conditions will amplify customer attempts to influence late supplier recovery when your company’s efforts are not enough. If your customer is a multi-billion corporation that issues multi-million subcontracts, for example, your supplier should recognize the potential of gaining or not losing future business. It helps too when the End User is an entity with “deep pockets”, like a government organization. A customer can exert more leverage if your late supplier does higher volume business with them as well. Technical problem resolution may be expedited by enabling three-way engineering conversation between allowing the customer, your engineers, and the supplier. Lastly, seemingly unconcerned late suppliers may be jump kicked into “going the extra mile” after the customer or end user describes the mission supported by their product (i.e. without you, we can’t send the Artemis 2 spacecraft to the moon in time).

When a situation compels direct communication between your customer contacts and your Supplier contacts, I suggest taking precautions.

• Role Responsibilities. Diplomatic reminders of role boundaries may be necessary. The Buyer is the responsible manager of and liaison for the Supplier and the underlying purchase order. The Program Manager or Sales Manager/Rep is the manager of and liaison for the customer and the associated sales order. Role boundaries should be respected. Examples of role violations include a task authorization directly from a P.M. to a supplier or a promised delivery date directly from a Buyer to a customer.

• Communications Protocol. Customers should not contact or make requests of your Supplier directly. Your company liaisons should be present for any type of meeting in which both supplier and customer are present (even the technical ones). Exchanges of documents should always go through the liaisons first.

• Confidentiality. Most likely, there are non-disclosure agreements in place between your company and your supplier, and your company and your customer. Liaisons must manage information flow and take care to not accidentally divulge proprietary information during joint communications.

Believe or not, having your customer “all up in your business” can actually be beneficial in the long run. Especially in NPI & Development programs with complex deliverable products, inevitable supplier delivery and conformance issues will pop up. Successful or best-effort delivery recovery that results from professional, committed, and collaborative resolutions will ultimately strengthen your company’s status with the customer.

It’s a probable occurrence in new product projects. Company delivery runs late, usually because of technical issue. Customer wants greater visibility and assigns representatives for assistance. Company reaffirms commitment and involves Supplier as needed. If Company maintains schedule momentum, provides updates, and resolves new issues jointly, the professional relationship strengthens with Customer. By program completion, the Company is established as a top candidate for new business.

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Contractual Leverage

Falling back on legal threats or actions shows that your company is willing to cut or risk future business with a supplier. This is after all the effort to get them on Approved Supplier List presumably with the intent of developing a long-term relationship. If a company feels that they need to pursue this option, in my opinion, it’s a signal that insufficient procurement effort was put into the supplier sourcing, selection, and contract award phase in the first place.

Rant aside, you might be able to use your purchase order’s contractual flow downs effectively as a tool for motivating favorable action from the supplier. Hopefully they will not call your bluff. Your intent can be expedited delivery of your late parts or an acceptable solution to a sticky nonconformance problem.

Before issuing their first purchase order, all Buyers should already be well-versed in their standard p.o. terms and conditions. (If not, do that first!). Review all documents associated with the order to ensure you truly have the clout to “speak softly while carrying a big stick” (to paraphrase Roosevelt’s famous quote). If you’re not sure, consult your Management or your Legal Dept. (And, using this tactic, you’re going to want to keep your Management informed or otherwise act per their direction at any rate).

Questions to consider before leveraging legal reminders, threats, or actions against a late supplier:

• Order Value. What is the financial value of the order? Millions of dollars or $100?
• Contractual Obligations. Are there other contractual documents in place that should be reviewed besides a purchase order, like a Long Term Agreement (LTA)?
• Purchase Order Acceptance. Did the supplier formally accept the order, making it contractually binding? How was it legally accepted or confirmed: signature on a P.O. copy? Email? Their own form?
• Supplier Acknowledgment. If supplier accepted the P.O. via their own form, did they notate any exceptions? Did you formally confirm or deny the exceptions? Did a Change P.O. address any changes to terms and conditions?
• Terms & Conditions Clauses. Did the accepted P.O. flow down any relevant clauses for which supplier did or may breach? Examples:
  • Penalty. Penalties for breach of contract, like late delivery.
  • Termination. Conditions under which order may be cancelled.
  • Inspection and Rejection.
  • Representations and Warranties.
  • Dispute Resolution.
  • Indemnity.
  • Right to Cover.
  • Legal Arbitration.
  • Change Orders.
  • Force Majeure.
• FARS / DFARS Clauses. If the U.S. Government is a customer or end user, are there applicable FARS or DFARS clauses?
• International Supplier. Are there other country laws or special clauses to consider if the supplier is foreign?

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Summary

Dealing with late purchase orders for parts or services that hold up production or may cause late product delivery to your customer is always painful. This is especially true if it takes weeks or months on a recovery due date. Therefore, my last piece of advice is to do everything you can in the first place in order to avoid late deliveries on a critical orders. This requires more of a strategic and proactive mindset. I will cover methods in a future post. In the meantime, I hope this information is valuable and comment if you think I missed any tips or techniques.