Another Ducking Digest?!
August 21st, 2023:
Navigating Purchase Order Pitfalls –
Lessons from Manufacturing
Happy Monday from crazy hot Austin, Texas. Lindsay is joining us from SoCal – so much nicer weather. He can go outside and enjoy his pool, hike, and walk all day. This is our weekly news show called ‘Another Ducking Digest.’ We chat for about 15 minutes each week about topics relevant to people working in supply chain for small and mid-sized manufacturers. Lindsay has been in supply chain in the manufacturing space for over 30 years. He is our expert on the show and comes to talk about stories and examples and things that he thinks are really relevant and top of mind happening in the industry today. So today, we are talking about something very near and dear to my heart. I work in the direct materials part of supply chain around purchase order management and purchase order changes. So today, we are going to be talking about what can go wrong with purchase orders when you are working for a small or mid-size manufacturer. So Lindsay, I’d like to have you start by talking about just some really general things about what this means. And then I know you have a list of 10 or so examples that you’re going to highlight and talk about from your career. And I want to make sure that we incorporate some examples as well for those in the audience. Drop us a note, tell us where in the world you’re joining us from. If there’s a specific problem or challenge that you’re dealing with today that you’d like Lindsay to touch on, drop that in the comments as well. We’re always looking for new ideas for our show. We want to make sure that we’re talking about topics that are really relevant to our audience.
Thank you, Sarah. Good morning, a little gray and overcast and cooling Southern Cal this morning on the heels of Hurricane Hillary. But we’re all well, might not be getting too much pool time today.
All right, so an interesting title, right? Is it true, you know what can go wrong with a small manufacturer? Why is that any different? Well, small companies, smaller ERPs, narrow procedure manuals, small staff, all part of fueling being fast, nimble, and responsive versus the big company, big companies, lots of controls, lots of regimen, lots of strict process, perhaps even some semblance of robotic process automation in place that precludes a lot of the things that can go awry in a smaller company. So yeah, all the usual data points that can get out of whack. And I kind of touched on the first issue. Is that a couple of good things, one, you know, there’s 10 examples, right? It’s pulled off the top of my head. One, documenting that 10 is a darn good start to explain to the rest of the organization, communicate to the rest of the organization, ‘Here’s the complexity, here’s the pain points, here’s the gotchas.’ Two, it’s a good point for quality to say, ‘Stop giving me a quality procedure that says, you know, I place a PO and the goods come in and get received and go to stock and that’s all I do.’ You know, that minimizes and puts an administrative minimalization on the supply chain role. And Lindsay, I would ask you, you know, you’ve documented these 10 examples, what is this, so what, why does managing purchase order changes actually matter so much? Because I’m not sure that people who don’t have line of sight or visibility and just supply chain even understand why it’s such a big deal.
Exactly. And, you know, we’ve got to be careful with these words. It’s not that they’re stupid. It’s that, you know, it behooves us to fully explain, here, here’s the complexity we’re dealing with. And we’ll, we’ll talk about a little bit of that in a minute because, again, Finance could be our friends, especially today, Sarah, you know, the world’s talking about the digital transformation, so-called RPA, robotic process optimization, or automating workflows to try and get us all closer to being the Amazon best-case scenario, right? You can’t automate anything that doesn’t work. You can’t automate inconsistent processes. You can’t automate if you’ve got bad data. So, we always, it behooves us in this, you know, this top-level interest concern goal, the automate, it behooves us, it proves us to have a tighter process and better data. So, some examples, the textbook, chat GPT, obvious example as well, if the process is slow, it’ll be inefficient, yeah, okay, fine. Real-world small company, yeah, what if it, what if it’s too fast? What is, what is, what if we have to get it done now? You know, how many buyers can put up their hand and say, ‘I’ve been told, buy this now,’ and perhaps even by the president of the company or your boss’s boss or even just your boss?
The point is, you stay in your lane, don’t panic. You’re a professional, expedite the standard process, don’t cut corners. You know, one of the explicit things I tell purchasing teams is, from the person in the com, just because the president of the company told you to buy this part doesn’t mean you create a PO, he initials it, she initials it, and it goes in the folder. No, you’ve got to immediately be astute that I just went out of process and that’s fine, but now what do I do when I go out of the process? When I worked for Arrow Electronics, Arrow had maybe six, four, six, or eight ring binders of all the procedures for the company, yeah, the multi-billion-dollar organization, too confusing for everyone, but there was a single page that people hung in their cubicle called ‘The Ten Commandments,’ and that was the 10 basic rules. The beautiful thing about the Ten Commandments was when it was presented to people, that there was a get-out-of-jail-free card, and that was if you break one of the Ten Commandments, all you do is you pick up the phone and you leave a message or email Steve Kaufman, the CEO, and say, ‘This is what I did and why I did it, and we need to circle back, the team needs to circle back and fix it.’ The point is, don’t hide, and I thought that was just a wonderful way to, sure, do what you think’s best, if you still think what you’re doing is in the best interest, then go ahead and do it. But for goodness’ sake, tell us, don’t surprise anyone.
So, number one, delay processing. Number two, thank you. Number two, ha, let’s do one of Sarah’s favorites, right? You know, supplier issues. Okay, we’ll start with the easy one. Supplier issues, mine from the wrong supplier. You know, the new buyer comes along or someone’s helping out or someone says, ‘Who should I buy this from?’ And someone says, ‘Oh yeah, yeah, just get it from Granger, get it from McMaster-Carr, get it from a Broadline distributor.’ Yeah, yeah, that won’t be a problem, not realizing that, yeah, we can buy if we’ve got adequate lead time, you can buy it directly from the manufacturer for half the cost. Or worse still, that, ‘Oh yeah, that low-cost region supplier we used to buy it from, they’ve been disqualified.’ Now, they’ve been disqualified on the offline quality department-approved vendor spreadsheet, but in ERP, they still show us an active vendor because a lot of small ERP systems show vendors as either active or inactive completely, which is a completely different paradigm from the quality group. So, you know, that’s a fun one. It routinely happens. We should accept that it happens, so we should have a quality procedure that says, ‘What do you do when a PO gets placed with the wrong vendor or a vendor that turns out to be does not have an active approval status?’ And you know, it’s an easy check to run.
Typically, I run it at the end of each month, and I run a spreadsheet of, ‘Show me all my suppliers that were active in the current and the past months,’ and then do a comparison with the latest and greatest approved vendor list from the quality department. And typically, when you start that process, there’ll be a handful of fallouts as you go down two, three, four, five months. Of course, it gets cleaner and cleaner and cleaner, but eventually what you’re typically doing each month is you’ll find a supplier that, ‘Yeah, we don’t have them on this approved supplier list.’ It may be a consultant, it may be the quality auditor, it may be Edison, you know, but there’s a conversation, okay, what do we do about this supplier that, and then the action goes back to the buyer. ‘Hey buyer, you placed this PO with this supplier. They’re not on the active list. Go ahead and drive getting it resolved and fixed.’ So that’s a fun one. I like that one, Sarah’s favorite.
Very important that we slow down and get everyone to understand the difference between supplier acknowledgment of a purchase order and supplier confirmation of a purchase order, especially at the risk of being politically incorrect when we’re, when we’ve got English second language folks involved in the equation and when we’re translating, that’s all we’re saying here. Because the point is that two very different things, Sarah gives Lindsay a PO and Lindsay says, ‘Thanks, got it. I’ve acknowledged it now.’ And that may seem very simple and basic, but it often gets missed, just a very basic acknowledgment of a purchase order because a buyer is getting hundreds of emails manually, oftentimes sending those reminders and forgets, and the PO is not even acknowledged. So I just want to call that out. It seems really, really basic, but it’s important. Yeah, yeah. And as if that wasn’t bad enough, and the acknowledgment comes in different forms, you mentioned an email, it may be, if I do a chunk of my business, even though I have my 200 active suppliers, I do a chunk of my business with Arrow Electronics. And because I typically have 100 open orders with them, they send me a spreadsheet, because things keep falling through the cracks. So my order confirmation from them or order engagement from them is a spreadsheet.
Now, order confirmation, supplier confirmation, means the supplier has reviewed it, the supplier agrees to terms and conditions. What does that mean? It means they agree, they can support the quantity. It means they agree to that price that’s negotiated. It means they can support the delivery date. And it means they’re going to support, for a build-to-print part, they’re going to support that revision level now. So, the three things. One, everyone needs to understand the difference and be explicit about it, to the point of being pedantic, just to make sure that that’s kind of almost like a weekly reinforcement thing, especially with new employees, perhaps, to understand that they are routinely getting mixed up, especially with where there’s a language barrier. And three, as Sarah added, yeah, the emails can exacerbate the risk of all this. And Lindsay, I will say, since this is kind of where I spend most of my time in this supplier confirmation of PO world, the three most common changes that we see are price changes, quantity changes, and delivery date changes. A buyer will issue a purchase order, and those are the three most common changes that a supplier will propose back to a buyer.
So maybe in the interest of time, Sarah, I’ll give you an example of why that’s more insidious than it seems, and maybe we’ll do the rest of the list next week since your list of 10, we only got through about half of it. And I feel like there’s even so much more beyond the 10 that we even have listed about all of the things that can go wrong and happen with purchase order changes. We will see all of you next Monday at 10 A.M. Central. Feel free to reach out to Lindsay or me, give us a shout on LinkedIn, and if you have any topics that you would like us to cover, don’t be shy about sending those our way as well. Thank you, Sarah.