Another Ducking Digest?!
September 11, 2023: PO Chaos: Recovering from Oversized Orders
Welcome to our weekly news show called Another Ducking Digest. It is a 15 or 20-minute (depending on how much content and stories Lindsay has to share) talking about topics that are relevant to small and mid-market manufacturers. We feel that that’s a really important part of our economy, and sometimes content is lacking and underserved in that vertical.
So, with that, I am going to kick off our topic for today. We’ve had a lot of questions come in around things that are going haywire with purchase orders. So, the topic for today is: When a PO goes tilt, how do you recover, and most importantly, what lessons can you learn from that to ensure that it does not happen again? So, Lindsay, I know throughout your career, you’ve had more than one PO disaster that’s kept you up at night. So, I would like to have you maybe just talk a little bit about the why, and then I know you have a really great example that I’d like to have you share with us today.
Yeah, I think, never ask to get into a situation of asking a Scotsman to tell a story because that can go any which way, Sarah, and the risk is as much as it’s an endearing tale and even Goosebumps. The problem is our line of thinking, discussion thread gets lost in the mud. And this is an interesting one, you know the one we chose. You know, the primary customer of purchasing is typically production. The primary focus of production is, “Give me all my parts, just get out my way, let me build the stuff, less so, don’t tell me about extra stuff.” So today’s example is the extra stuff and what can we learn?
The background to this scenario is a simple little purchase order request for 100 pieces of a $20 amp 64-pin gold flash connector. 20 parts should have been a $2,000 order, except for the order was placed for 10,000 pieces instead of one hundred. So, standard root cause corrective action right there.
Lindsay, you said the pieces; what was the difference in the dollar amount? Because I think that’s where it really becomes important.
Yeah, it is, and I’m glad you flagged that because we should circle back to that at the end of this. Because there’s a lesson there. A hundred pieces of a $20 connector, who cares? It’s a $2,000 order. Make sure it’s right and send it off, don’t worry about it. Ten thousand pieces of a $20 connector becomes a $200,000 PO, and you know, yes, there’s a dollar impact, but there’s also another flag here that says, “Hey, on the high-dollar stuff, let’s add additional support names, so when it goes wrong, there’s two root cause corrective actions. There’s the occurrence, there’s the detection, and we’ve all gone through our man-machine method material analysis of what’s the real root cause. You know, buyer training is not acceptable.”
So, on the occurrence side, the purchasing assistant that placed the order misreads demand from her ERP buy sheet as the 100.00, and she misread it as ten thousand.
So, we’ll come back to that one, but then okay, how did, why didn’t this get caught? Well, two things: one, purchasing manager signed off on the high-dollar PO without checking the details, and secondly, the bad one is the ERP exception reports, which were in place, were either ignored or not actions. So, that’s the setup to our fiasco. What happens next, you know, and in our perfect AI world, you know, Lindsay gets a beep on his cell phone that says, ‘Hey, something weird just happened with a big order that has no demands, you know, and it’s big dollars. We need to jump right in.’ Less so in this situation. What happened was, God bless them, our suppliers, right? This PO was placed with AMP. The outside sales rep called and said, ‘Hey, the demand for this is way beyond what we talked about, and this is big dollars, and I didn’t expect this. Can you confirm this 10,000 piece requirement?’ Unfortunately, the AMP sales rep placed this call, left a message, perhaps even visited and sat in the lobby 14 times, and no one, no one, no one gave him the time of day. And finally, finally, he swung by with a different message a few months later and said, ‘Hey, the first delivery of these connectors is coming in. You might want to alert your accounts payable because of the dollars involved.’ And at that point, the senior buyer that this had been flagged to said, ‘What are you talking about? You know, there’s, there’s no big order for connectors.’ And she went into panic. Okay, so now we’ve, there’s been the occurrence, the errors happened, it hasn’t been detected, the supplier tried to help, got ignored, and now we’ve got, now we’ve got a situation to recover from, right? So, how are we in Lindsay? I know that, you know, when you and I were prepping for the show today, we talked about it’s important to have recovery steps, which I’d like to have you go through, kind of, what are the key things? And there’s a lot, but I think also what’s really important is lesson learned and what can we do to prevent something like this from happening again or put better measures in place to raise the red flag that’s saying, ‘Hey, this probably is outside of the norm.’
Yeah, absolutely, especially for our audience today, Sarah. Really, it’s, it’s no great kudos for the supply chain team to be known as the world’s best firefighters. That’s nice, that’s good, that’s that’s a strength, but really it says you work in chaos, that things keep on going wrong, and you’re just a safety net rather than leading in on intelligent solutions or being identified as being the planner, the strategist, the person in control, the person that knows before anyone else in the organization, let alone the freaking suppliers, that things have gone awry. So, the recovery is fairly standard, and like you said, a complete waste of time and energy. But, you know, the 14-step recovery, okay, it gets escalated. It gets escalated to supply chain, the hero in the story, right? Supply chain apologizes profusely to the multi-billion-dollar AMP Corporation and then focuses on the outcome. You know, it’s not for us to go off and seek blame. Right? We focus on the process, focus on the outcome, leverage the relationship, ask to cancel a non-cancelable PO, concede, compromise to accept the partial. Also, on the hook to buy the working process of the component parts for AMP. What? How the heck do we deal with that? Okay, agreed to take, set up part numbers for the connected housing, set up partner numbers for the gold connector pin, bring them into stock. The gold connector pen needs a secure location because it is gold. Set up, set up, agree that AMP will take back the parts as they have demand from their global customers. So, the stroke of genius was to set up AMP, the supplier, as a stocking location for this part. It would become our company that anyone in the AMP world who wanted to order this connector would order it from us. So, that would flag AMP not to make any more at their factories. And once a month, AMP would send a purchase order to the OEM to, ‘Hey, give me another, give me another thousand, give me another ten thousand of this part.’ So, we do monthly shipments. We had to do this. We had to set up our supplier as a customer. And then, of course, there’s the communication part of this, the, it falls under the slow umbrella, right? Slow-moving, obsolete inventory. But, you know, report it to both the materials manager and the finance manager that here’s, here’s the gradually decaying excess, obsolete inventory. And just work through, and it took maybe 12-18 months, I think a couple of big orders came in from other customers, so it flushed out a little bit sooner than we were worrying about then it might go on for two years. And then, anecdotally, you know, organizationally, the purchasing assistant, the senior buyer, the purchasing manager, they all moved on to new opportunities. But I think you’ve hit the nail on the head right at the start, Sarah, that, you know, in short, a complete waste of time. You know, it worked. And Lindsay, before we get into lessons learned, which I think is really, really important because everyone who’s worked in procurement has had a PO disaster, somebody’s placed an order for a quantity or price that they shouldn’t have. I mean, it’s just the nature of the business. But it seems very obvious, but why are not more checks and balances put into the ERP system itself where if something is over a certain dollar amount or a quantity variance is greater than x amount, like it seems like that would be very obvious and basic to have that built in?
Yes, that’s all true. As well as that, there’s also, it’s all both of them, you know. The cancellation report clearly flags a planning execution issue, if not an outright error. The reschedule, again, flags, you know, a scheduling issue. So both of them lend themselves to a team discussion, weekly purchasing team discussion. Hey, how do we get here, you know? What’s, so what, what do we do about this? Both of them lend themselves, you know, we’ve had the KPI conversations there, right? Great couple of KPIs. How many orders do we have in the system? How many open orders are flagged for cancellation? Great KPI. How many orders, not so much. How many orders are scheduled, are flagged for reschedule recommendation? Because there could be a bazillion, right? And it could be like move a five-dollar order out three days, who cares, right? Now, move a two-hundred-thousand-dollar order out a year, okay, that’s a big issue. So, I guess it’s the product of dollars and days that you could add up and say, hey, put this on a KPI. How many, how many dollars and days is ERP telling me to move stuff out? And if it’s telling me to move a hundred dollars out seven days, don’t care. If it’s telling me to move two-hundred-thousand dollars or even fifty thousand dollars out twenty days, that impacts my cash flow. So there’s an opportunity there. Now, worst case, we don’t have the exceptional board, that would be terrible. You know, we’ve got to get the exception. Ideally, especially with our conversation around AI and clever apps, here’s a beautiful niche-tailored problem statement that says, ‘Show me, send me an alert anytime a reschedule is greater than, choose a number, a hundred bucks, 200 bucks, and more than 10 days.’ Okay? And anytime that happens, send me an alert. In fact, send it to the buyer but also copy me because I want to know about that, both to check with the buyer and say, ‘Hey, what’s going on with demand? Or do we need to have a chat about how we’re scheduling our orders?’ But I don’t need the harassment of bringing in inventory that I don’t need. So there’s, as the point is, there’s a second level of opportunity with these, the reports. They’re not just benign reports. Yeah, see, I think a key learning and takeaway is also the importance of supplier relationships. If you have good relationships with your suppliers and you make time to prioritize that, this is like, you don’t have to be as, could be. Yeah, I mean it’s a great one for laughing or crying over a beer afterwards, and it clearly brings the manufacturer and the supplier closer together. Nothing like going through a little bit of hardship together to firm up the relationship. But you know, it’s also a little bit, yeah, the waste of time, things we’d rather be seen as being proactive and insightful and in control rather than needing help with the basic nuts and bolts of the business.