Another Ducking Digest?!
August 28th, 2023:
Impact of PO Errors in Procurement
Welcome to Another Ducking Digest! This is a 15-minute news show hosted by myself and Lindsay. Almost every Monday at 10 A.M. Central, we do take holidays off. Just chatting about Labor Day next week, but for the most part, every single Monday. Lindsay has over 30 years of experience working in supply chain and manufacturing. Most recently, he served as the SVP of supply chain for a mid-market manufacturer in Southern California. Each week, we pick a topic that is relevant to supply chain professionals working for small or mid-sized manufacturers. This is a part two, so last week we talked about purchase order errors. The switch was actually a request from one of our listeners who asked that we talk about this, and there was so much to talk about and cover that we decided to break it into two segments. So, we are part two of purchase order errors.
So, Lindsay, let’s have you do a couple of key takeaways from what we talked about last week, just in case we have listeners who are joining us today that weren’t there last week. And then we will dive into—I’d like to talk about not all errors being equal today, and then specifically talk about quantity discrepancies since this is something that’s really, really important and a big challenge for anyone working in manufacturing.
Thanks, Sarah. Yeah, where to start, right? Because this conversation can go on way longer than 15 minutes. Okay, what did we get to last week? It’s, you know, the textbook problem of wrong peers, steers this interaction of, well, there’s misunderstanding, there’s delays, there’s reconciliation, there’s audit findings, there’s incorrect quantities, prices, descriptions, yeah. And you asked a great question last week, Sarah. You said, you know, so what, you know, what’s the consequence of that and what’s the consequence to our supply chain practitioners? So the consequence is, you know, the big one, the Schoolboy one as well, we can’t move ahead with robotic process automation (RPA) without having good data, without having, with our, you know, if we’re encumbered by bad data or inconsistent process, then we can’t get started. But the real everyday problem is there’s going to be that supply chain is wasting time, the supply chain performance drops from being effective to mediocre, and it’s certainly perceived that way. Our supply chain team reverts from being proactive to reactive, which is never healthy. And you know, our value of ERP being the single version of the truth, that’s no longer embraced by the organization, in fact, it’s discounted to glib rhetoric.
Lindsay, I would add to that, I think one of the, in my experience, one of the biggest challenges with purchase order errors is it leads to inaccurate data in your ERP and your MRP, and when you have bad data, doing demand planning or any sort of predictive type work is really, really tough and can cause a lot of cash flow issues within the organization. So that’s an excellent, that’s an excellent checkpoint to check, you know, are we ready to do process automation? The first question is, do we have good data? How would you, second question, how would you know? Answer, are the reports, like, do we run a full set of reports on expediting exception management and other reports? All view it as accurate, and does everyone in the company trust them? If no, then you’ve got to take a step back. The second thing we looked at last week was the scope. It’s not just, there’s not just one way Lindsay can mess up a purchase order, there’s, you know, we touched on 10. So, the takeaway from that is we’ve got to recognize we’re not in—it’s not an ideal robust process. So, that being brings up another problem.
Another problem is that culturally, especially in smaller organizations, small quality teams, there might be an idea that we’ve documented our process, where I so compliant and everything’s good and well, well, you know the rest of the organization has to get their head around recognizing that we’re in a less than ideal situation and that can cause stress within your organizational culture. Third point from last week, I think was you said that not all mistakes are equal and you know we’re calling things, we’re putting things under the collective umbrella of purchase order errors and you know sometimes the purchase orders exactly right except we did the wrong thing. My example of that, if I may, is you know Gary worked for me. He was a supply chain manager and one day he got yelled at by the president of the company. He got yelled at for being out of stock on consumables and the president of the company said something along the lines of “Gary, I want everything that you’re telling me is at the supplier in England and I want it here immediately.” So by golly, Gary did just that and expedited 28 pounds of material from London, England to Los Angeles on a 747 cargo for next day delivery and we don’t talk about him in tens of thousands of dollars that cost, but we got a reminder of that and no one was allowed to ask why all these pallets of material were lined up in the service department of the organization because the warehouse refused to accept them, they didn’t have space, they knew they weren’t needed, so these 28 pallets sat for years in the service department. An example of we got out of process, the president was frustrated, the president said what he wanted done, what the supply chain team should have done was say, “Okay, we need to revisit this, we want adequate material here or we want the right material here at the right time.” And by the way, the boss said increase safety, essentially said increase safety stock, increase our minimum order quantity, and have it scrutinized by the team and that didn’t happen, so different ways that we can get to wrong PO is the point and don’t just do something because your boss says so, well do it, you know, we don’t ignore the boss, the boss is the boss, especially in a small company, but the boss said get it done, the boss did not say, “I need you to skip all your process and all your process controls and do shortcuts to make this happen,” he said get it done and expedite. He or she said get it done and they expected that to be done quickly. So we do what we’re told but we immediately rally the troops and say, “Okay, this is what we’re doing and how we’re doing it, what do we need to do to cover our bases?” And you may even call the supplier, “Hey, I’m going to expedite the heck out of this, stay tuned while we figure all this out,” and many did you get on get you on a call to talk through all that we’re doing and who’s applying, we’re doing it.
The takeaway, you I’d like to you summarize some of the takeaways from last week, you know the mistake that I’ve been guilty of is the idea of the temptation is supply chain is a great place to bring in outside people. What I mean is journal entry-level administrators, maybe even someone from the factory floor, and bring them into a supply chain. It offers a career path to move up through supply chain, great career. The don’t lose track of the fact that to be successful, successful buyers are going to be detail-oriented, they’re going to recognize that mistakes will occur, they’ll occur with suppliers, they’ll occur with supply carriers, they’ll occur, you know, world events, for goodness sake. Successful buyers are going to be multitaskers, so they’re going to monitor a broad range and they’re going to look for issues, they’re going to look at exceptions. We talked earlier about they’re going to look at a range of KPIs, including, of course, their client on-time delivery, including, of course, their supply runtime delivery, but also the KPIs that tie directly to their current pain points, and hopefully they’re able to do that by some mechanism other than just email because emails, you know, gonna you just bog them down completely. In successful buyers are always going to check and never assume. And then the flip side of that, the flip side of that, you can tell I’ve been thinking about last week’s conversation, the flip side of that is the managers, to be a successful purchasing manager, to be an effective marketing manager, and I’ve seen so many who are not, they have to recognize the buyers are working in a less than a perfect situation and that’s going to require empathy, it’s going to require support, it’s going to require attention to detail, but you know you still don’t let go of the relentless drive for process improvement, but you know in the dark days you got to hit pause before you punish. You know, Lindsay made another mistake on a PO, okay that’s not good, which mistake did he make? Is it the same one he’s made the last three weeks? Okay, then we have to do something about Lindsay. If it’s a whole new different one, okay, let’s continue to look at our secondary processes and the depth of our training. The third point you made was not all processes and errors are equal, you know some are the easy ones, almost buying their own quantity typically. ERP is our friend and the next day’s exception messages are going to set us straight. Even buying from a non-approved supplier, provided we have a check control in place that says at the end of the month give me a list of all my suppliers that I used in the past month, merge it with my approved supplier spreadsheet. Typically it’s an offline spreadsheet, part of the problem in a small company, part of the challenge, and show me anyone who’s not on the approved supplier list so we’ll catch it that way. The receipts transaction errors, which you asked about originally, and they’re a doozy because they can occur in so many ways. We talked last week about when the when we buy 10 packs and three packs, if their receiving transaction doesn’t, the order unit of measure does not match the stocking unit measure, purchasing buys in feet, the engineering bombs in inches, the purchasing buys in 10 packs, we stock singles. The problem is when Lindsay versus isn’t receiving and he receives 10 10 packs instead of a unit of 100, now your purchase order the open balance on your purchase order stays open for another 90 or another nine and what’s going to that cause is purchasing to think regardless of what the system tells me I’ve got I’ve got an open order so I’m covered and that’s wrong. It also causes the on-hand balance to be inaccurate and be understated, that causes parts not to be issued to work or because the system says we don’t have them stockroom says oh yeah we do, now people lose confidence in the single version of the truth, accounts payable gets a heads up from the supplier when the supplier invoices for the full quantity and they say no no no we only received this.
So we’re going to short pay now. The supplier complains, the that gets resolved in a bad scenario in a bad culture. Accounts payable tells receiving fix the problem, correct it the or were still force fixes it by doing an adjustment. Typically Finance can override material transactions. The need is that every player got to appreciate both the breadth and the impact of the error opportunity, as well as the broad range of recovery. The complexity of the recovery process and I would argue, Lindsay, to kind of tie this conversation up around the quantity discrepancy is what is the net impact to the organization. So all of these things happen to me one of the biggest net impacts is what happens with your supplier relationships. Relationships are really, really important and it can cause stress, it can cause relationships to be harmed when you don’t get your quantity discrepancies process under control.
Yeah and and you know the all of us should be sensitive to our supply chain identity, you know are we respected within the organization and and and outside, and part of that respect will be generated by the supplier base. So suppliers, you know they talk, they gossip or our own co-workers talk gossip and they say hey supply chain messed up again, the buyer got it wrong again. They we shipped all the right stuff, they wrongly transacted it and you know as a supply chain manager, you know like you say so what’s the net impact you know so on I’ve got a lot to worry about. Well yeah, work orders that delayed, working relationships compromised, internal working relationships are tested. Multiple people in the organization have to get involved to resolve the situation, including subject matter experts and that’s obviously a key resource resource. The corrective action to resolve this going ahead, you know has to be beyond just employee training. So that brings up I think a good point for you to touch on. So what is the action? We know that there’s an issue, we’ve done an audit, what are the steps or things that I need to do as a leader in my smaller mid-size manufacturer? Yeah first, you know we’re going to manage intuitively a larger one of the time, so intuitively recognize one, the complexity of the PO process. Two, the multiple error opportunities and then three when these hiccups do occur, recognize that the recovery process is going to be involved. So you know the mitigation you know with beyond all because it’s so easy and I appreciate you doing that Sarah because it’s so easy to first especially for someone like me to get sucked into the details of the reversal process but really yeah first off I think there’s five right there should always be like three or five, good number one don’t assume that everyone is well informed and what do I mean, you know they don’t assume everyone’s well informed about the scope of the complexity of the procurement process. Don’t assume especially that everyone’s well informed around the risk and the recovery management, how do we work through that, you know that it doesn’t lend itself to quick directives, go go fix this go change this, well there’s consequences of doing that.
Yes we’ll get that done right away Sarah, now get the team together how do we do all our transactions. Secondly, this is where quality often trips us up because quality has a quality manual with procedures that we use to get through ISO, therefore it must be good. But typically it doesn’t address the secondary procedures, the exception procedures, the recovery procedures, what to do when things aren’t perfect. Ensure ensure thirdly ensure that everyone understands the escalation process, okay Serato lends to do this he went and did it all right who does he tell what he’s done to solicit input on what do we have to do next or what other things do we are to do to protect the organization and then fourthly you are one of our favorites so we’ve got to work from a foundation of good known good data and specifically in this situation what that means is that our dates in the open purchase order one can we run an open purchase order report God help us if we can’t, who is it accurate and three it’s and and to the extent of if we’re showing POS that are from last year let’s purge them out, you know we got to go through that data cleansing process that that is so essential to get started and then five don’t don’t don’t let’s sweep this under the table, you know recognize that this is a challenging process and and use the out of compliance peels to drill into root cause use them for an open discussion use them for our weekly purchasing Roundtable safe space let’s just talk it through again what what what what was happening what was it that happened what do we think caused this how might we great question how might we how might we have avoided this? What’s the best way to recover? How many steps are there in the recovery? Who do we need to talk to? Is there anyone else we need to tell just just have that as an open dialogue? With the purchasing team and I would also say, Lindsay I know you talk about this a lot on our show, don’t assume that everybody is well informed about the procurement process so if you’re speaking or working internally or working with suppliers over communicate because they may not know about the issue and or what the process is to solve and move forward and yeah I’m getting to getting to the relay getting someone to admit they don’t understand is a real tricky thing to do inviting someone to say would you like me to step through how I do the recovery or flying through the recovery process and have you critique it, you know that might be a softer softer approach working in Mexico with a production manager and asking him do you have a daily morning routine that you come in once you’ve got your cup of coffee do you do you have a set of reports that you go to that that tell you what’s going on in your factory and or would you like me to show you, you know the routine I use and that that that conversation is oftentimes disturbing that factory managers don’t have here’s the five reports I go to here’s the here’s the push that I get from it here’s the exception I go and check here so I check how many orders do I have open how many orders are late I may order the schedule yesterday how many went out. Yeah that’s what I call firefighting mode, well that’s yeah that that’s it tease you up to have data rather than rather than wait for someone to burst in the door, the firefighter to burst in the door or something to burst on the door looking for a firefighter right, yeah exactly.
All right so Lindsay and I are taking next week off since it is the Labor Day holiday here in the states we will be back on September 11th at 10 A.M Central. We are always looking for feedback on topics that you would like to have us discuss. Again these should be things that are relevant to you working for a smaller midsize manufacturer. You can drop Lindsay or I a note on LinkedIn to make topic recommendations for us. Wishing everyone a wonderful Monday.