The Arithmetic Of Failure
Elsewhere in this issue you’ll find my coverage of the 2008 Annual Convention of the Pacific Southwest Distributors Association. Legend Valve executive Robert Vick moderated a panel and also gave a fascinating solo presentation focused on creating trust in the supply chain. A minor part of his speech dealt with expectations among supply chain partners and a point made concerning order fulfillment is worth examining closer.
Vick explained that five things have to go right for an order to be satisfactorily filled by manufacturers to wholesalers, as well as between wholesalers and their customers: 1. The order has to be entered correctly. 2. The seller has to have the product in stock (or readily available). 3. The correct product has to be picked. 4. It has to be shipped on time. 5. The invoice must be error-free.
The math is such that if a supplier averages 90% accuracy at each of the five steps, the probability of error-free performance on any given order gets calculated by multiplying 90% five times, or .9 x .9 x .9 x .9 x .9. The result is .59, meaning only 59% of orders will be filled correctly from beginning to end. This would leave more than four out of every 10 transactions goofed up in some manner.
Suppose you as a manufacturer or distributor achieve 95% accuracy in all order fulfillment functions. The arithmetic then is .95 x .95 x .95 x .95 x .95 = 77.37. That still leaves almost one out of four transactions with an error somewhere in the process. Most companies would have a hard time surviving very long with that kind of performance.
Let’s extend Vick’s examples and assume 99% accuracy at each stage of the order fulfillment process. Punch the data into a calculator and you’ll end up with about 95% total order fulfillment accuracy.
This may be pretty close to our industry’s average, judging from anecdotal experience talking to contractors and listening to distributors discuss their accuracy rates – although sometimes they delude themselves by measuring fulfillment per line item as opposed to total invoice transactions.
That is, if 10 invoices containing 10 line items apiece contain a mistake with a single line item on one of those orders, you could invoke arithmetic to claim 99% fulfillment. But that’s as much a fantasy as taking a bunch of mulligans in order to break par on a golf course. In the real world, one line item mistake on an invoice spoils the entire transaction for the customer, so from a customer’s perspective our example would more truthfully be considered a 90% fulfillment rate.
Actually, even if honestly calculated, 95% fulfillment accuracy is nothing to brag about. It sounds good in the abstract but means that something goes wrong with one out of every 20 transactions. When your counter gets busy you may have 20 customers lined up at a given moment. Would you feel good about your business knowing that one of them is likely to fall victim to a mistake in filling his order? Turning the tables, if you drop clothes off at a dry cleaner once a week, would you continue to patronize that business if it lost or ruined some shirts two or three times a year?
Mistakes are a business killer. They cost the customer, as well as the supplier, time, money and aggravation. Plus, they build distrust. Contractor ranks teem with people who believe certain supply houses habitually short them on product or make billing errors in the distributor’s favor as an intentional business tactic. I suspect in the vast majority of cases the errors stem from ineptitude rather than larceny, but perception becomes a reality and gossip spreads quickly among your customers.
The good news is that modern office and warehouse technologies enable distributors to achieve accuracy levels unimagined when humans scrawled all orders in frequently indecipherable handwriting. The bad news is today’s levels of accuracy have raised expectations and lowered customer tolerance of mistakes. Years ago a blunder every 20 orders or so was viewed as the norm of doing business, but not anymore.
Humans are incapable of perfection, but not of coming close. Shooting for 99% accuracy isn’t good enough anymore. Better start striving for 99.9% in order to compete with the best-in-class companies of today and tomorrow.