On Time Delivery Question - Project to reduce late shipments

[Bcomer]

I am currently working on a project to reduce late shipments to a key customer. What I want to ask the group is for some help on quantifying the improvements made financially.

Can anyone help me figure out how to put a $$ cost on a late shipment? I know there is potential to anger a customer, but aside from lost orders (which is hard to quantify) what else can I use?

thanks,
Bill

 

[Steve Prevette]

Re: On Time Delivery Question

I am currently working on a project to reduce late shipments to a key customer. What I want to ask the group is for some help on quantifying the improvements made financially.

Can anyone help me figure out how to put a $$ cost on a late shipment? I know there is potential to anger a customer, but aside from lost orders (which is hard to quantify) what else can I use?

thanks,
Bill

How much time is spent on the phone responding to the customer's complaint?

How much time is spent tracking down the shipment to verify it was shipped (or when it will be shipped) and where it is?

Does this late shipment have a cascading effect on other shipments? Because this work was delayed, are resources pulled off of other work which will cause other late shipments?

Do you end up paying extra for "rush" shipment?

Do you pay an "expeditor"?

 

[buckwolf]

Re: On Time Delivery Question

I have found tracking OTD cost very difficult. It is almost impossible to get an accurate number. I guess you could track incremental costs due to late shipments and use that to illustrate your improvements, although, OTD is such a dynamic measurement and management should understand the real scope of the improvement made from the percentage improved.

Any numbers you get are probably going to be grossly inaccurate because you can’t really place a value on disgruntled customers and the disruption to your process. I would recommend just using the percentage improved and give e brief explanation of the impact late shipments have on your business.

 

[tony wardle]

One way to do this possibly is to assess the economic loss. For example, you buy raw materials for say $100, and convert it. Final cost $150. Selling price $160. If you got that item out on time and got paid, you would have made a profit of $10. The profit could (for arguements sake) be invested and start earning interest. If the item were sent out a week late, you could have earned interest on the money for a week but didnt - so made a loss.
Then there are added items such as - late delivery penalties, transport costs - air freight as opposed to say overland. There is a capacity cost, because in the time you lost, you could have produced something else that would yield a profit. There are stock holding costs, because the item is still a part of your stock untill it has gone.
So maybe you could quantify your costs as direct losses and consequential losses.
Hope this makes sense??

 

[MIREGMGR]

Do you have a friendly enough relationship with your VP Sales that you could ask him/her to offer some ballpark numbers for:

1. The cost of finding a potential customer, establishing a customer relationship, and maintaining that relationship.

2. How many late shipments, on average, it might take before a customer will leave to find another supplier.

If you assume that a customer lost due to late shipments has to be replaced, then the cost of obtaining a replacement customer divided by how many late shipments it would take to cause the prior customer to leave would give you a ballpark cost of each late shipment.

Be prepared for recipients of your report to be resistant to it due to the magnitude of that cost. That's one reason why you can't use this approach unless the source for the numbers is at a very high level in your own Sales hierarchy.

 

[Bcomer]

Re: On Time Delivery Question

How much time is spent on the phone responding to the customer's complaint?

How much time is spent tracking down the shipment to verify it was shipped (or when it will be shipped) and where it is?

Does this late shipment have a cascading effect on other shipments? Because this work was delayed, are resources pulled off of other work which will cause other late shipments?

Do you end up paying extra for "rush" shipment?

Do you pay an "expeditor"?

Thanks for the food for thought. Extra for expediting shipping at times and time spent on the phone are definte "Yes" answers.

 

[Harold P]

I would think that any costs added to the process as a result of the delay could be captured and measured. The capability to do so greatly depends on what you track today and what data you have access to.

Our Customer Service Reps track how much time they spend on the phone and what types of calls they handle (complaints, orders, etc). I know that isn't common but your's could probably provide a good guess on how much time they spend with a customer dealing with late or missed shipments.

The easiest ones to track would be any costs on expediting the shipment. For example, the costs of UPS Ground vesrus UPS Next Day. Another easy one is late charges, etc as mentioned above.

Also, if you incur additional overtime or processing time (from having to break in with an "rush" order) to expedite an order through the factory.

Hope this helps.

Harold

 

[Gregg429]

I think you need to re-think why you need that information. As others have indicated you are running down a path of being precisely wrong if you spend too much time and effort into determining the real cost. The question is what would you do if you knew the exact cost?

You need to benchmark the competition for both OTD and lead time. Are you competitive? Would increasing OTD by 5% get you more business? Would reducing leadtime get more market share? These are better questions to answer than something that will never show up on the P&L.

If you would like help with setting up a metric system let me know.

Gregg