PO Volatility — A Hidden Supply Chain Risk

Spend Matters welcomes a guest post from Josh Peacher, Procurement Practice at Archstone Consulting.

There are three underlying elements in PO volatility:

  1. The variance in timing between POs
  2. The variance in quantity ordered between PO's
  3. The frequency of change orders

For most enterprises, some degree of PO volatility is necessary for success. Complexity of organizational structures and unpredictability of the marketplace reduces planning to anything but an exact science. As demand changes or new information becomes available, organizations should make exception-based changes with their supply base. But, to quote Aristotle, we must accept "Moderation in all things." When the exception becomes the rule, PO volatility can infest an entire supply chain with hidden costs and unnecessary complexity. Here are some common pitfalls and the potential ramifications on the supply chain.

It's common to see companies see-sawing vendors with unpredictable PO volumes and frequent changes. This often stems from the incorrect view that suppliers work for them as opposed to with them. But this one- sided mentality can haunt you in several ways:

  • Longer Lead Times - A former client had made a habit of updating component PO's several times per week with +/-120% swings in requested volume. Over a two-week period, the supplier was seeing the same PO go from 5,000 units to 9,000 units back to 4,000 then back to 9,000. The result was that the supplier waited until the last possible moment to manufacture the components in anticipation of additional changes. This provided no flextime for the unknown, resulting in longer lead times, unpredictable on-time dates and expedited shipping costs.
  • Increased Cost - PO changes can also increase the purchasing companies landed cost. PO churn isn't free. In fact, one former client had so much PO churn that two of its main suppliers had to install dedicated back office departments just to handle it! Who do you think eventually absorbed that additional cost? You guessed it.

Manufacturing plants are optimized when a consistent, transparent production schedule is in place. However, in order to produce finished goods on a consistent cadence, component parts need to arrive on time with strong visibility. Due to longer lead times and unpredictability of supply, as mentioned above, the manufacturing process cannot adhere to a stable production schedule. Instead, the production schedule itself becomes volatile and reactionary in nature. This can lead to increased cost from additional overtime needs, changeovers and underutilized cells.

A volatile, reactionary production schedule can lead to decreased service levels through stock outs or manufacturing fire drills due to depleted safety stock levels. Not meeting customer needs can spoil previously strong relationships and create irreparable damage to an organization's revenue streams. However, when searching for the source of PO volatility, it should be noted that key accounts could be to blame. Make sure that your key customers aren't initiating the effect with volatile demand signals.

Key Takeaways
We've briefly identified how something as simple as inconsistency and a lack of transparency in the purchase order process can eventually come full circle through the supply chain to harm your company. While some level of PO volatility is expected, every company should continually monitor their situation to ensure it remains manageable. Below are three key areas to investigate should you recognize that a problem exists:

  1. Adjust your parameters - Tools like CTM can be very powerful if utilized correctly. But many companies haven't adjusted their parameters since the system was implemented and even then they may not have been accurately calibrated. If ordering parameters such as min/max, rounding values, safety stock levels, forecast splitting and planning time fences aren't aligned correctly to the business, the system could be generating unneeded volatility that is largely going unnoticed.
  2. Treat your suppliers as partners - Sometimes changing PO's is an easy way to cover for poor planning or other deficiencies. However, the immediate victims are suppliers. It's important to remember that it's not a zero sum game and what's good for suppliers is often good for you in the long run. If you're subjecting your suppliers to PO whiplash, check to see if your company is simply passing the buck due to internal weaknesses.
  3. Manage Demand - Many times, key customers are partly to blame for PO volatility due to fluctuating demand signals. Ultimately, a good planning organization wags its own tail by building enough flexibility into its supply chain to avoid fire drills or daily forecasting due to fussy customers. Prioritizing is also key when dealing with customers. Before reacting to every request, it's important to understand why you're reacting and whether the squeeze is worth the juice.

- Josh Peacher, Procurement Practice, Archstone Consulting

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