March 31, 2021
What is “On-time, In-full” (OTIF)
It’s the mechanism, the exacting metric, and penalty scheme that large retailers are using to rate and penalize their suppliers for non-compliance with purchase order quantity and delivery requirements.
Accounts receivable deduction management software and compliance systems are more important than ever to counter the profit leakage due to OTIF charges and deductions due to customers’ rigorous rules. The consumer goods industry – both retailers and their vendors- loses tens of billions of dollars of revenues every year due to out-of-stocks. Much of this can be attributed to too-lean inventories, poor planning, and supply-chain logistics issues.
Suppliers lose countless billions more due to customer accounts receivable deductions, those that are legitimate, wrong, or excessive, plus the pervasive post-audit claims taken by commission auditors a year or more later. You can’t get order fulfillment right 100% of the time, but if your team really works at this, your company will benefit by having a happier customer, reduced compliance penalty deductions, and greater profits.
The increasingly complicated global consumer goods supply chain makes the order fulfillment process very challenging for manufacturers. For retailers, lean inventory management practices demand that the goods they order be delivered on time and in the right quantities. Consequently, companies like Walmart and others have enacted purchasing rules allowing little room for supply chain snafus or logistical delays.
The metrics for delivery performance have changed to the precise “on-time, in full” (or OTIF) performance metrics, which compare both the quantity delivered and delivery dates against the specifications in the purchase order.
There is a solid rationale to it, and OTIF matters because a smooth supply chain is essential to have the goods on the shelves when needed. Most suppliers, however, are smaller companies and have neither the resources, systems nor operational capability to meet their retail customers’ expectations consistently. Large suppliers can handle it better, of course, but all suppliers have the same issue of dealing with a multiplicity of different customers’ requirements.
Many retailers will look at OTIF and related penalties according to what they feel they can get away with vs. using it as a friendly nudge to get suppliers to improve. Perhaps OTIF will morph into a back-door, retail profit enhancer. We hope not, but we’ll see.
A supplier’s failure to comply with OTIF rules can cost a lot of money in accounts receivable deductions, enough to wipe out profits in many cases. Walmart, for example, is charging 3% of the cost of goods ordered for failure to meet 98% OTIF, which is a combination of both OT and IF. For example, if you are on time (100%) but only deliver 90%, your OTIF score is 95%, and you get penalized. These deductions can amount to hundreds of thousands or even millions of dollars every year.
Standards for the On Time and In Full Program for Walmart U.S. Stores and eCommerce (effect with PO must arrive by dates after Sept. 15, 2020)
- On Time = 98% Prepaid and Collect Ready
- In Full = 98% General Merchandise, Health & Wellness, Food and Consumables
- 3% of the Cost of Goods Sold (COGs) of non-compliant cases or units
Here are some of the common-sense steps you can take to reduce this loss of revenues and plague your profits?
- Accounts Receivable and Deduction Management staff is on the front lines of the battle to reduce customer deductions, and AR automation systems should produce the data needed to track this insidious profit destroyer. However, accounts receivable is only the messenger here; the solutions lie deeper in the organization.
- To successfully improve operational quality reduce OTIF and compliance deductions, you need to create an executive-led cross-functional team involving all departments, even logistics partners.
- Establish compliance penalty and deduction reduction goals for your company, with a detailed tracking and reporting mechanism, and meet monthly to track progress.
- Understand each retailer’s OTIF rules, and put systems into place that assure compliance. Ensure you have a clear understanding of delivery appointment rules and schedules and for rescheduling when required.
- Have a system in place to communicate the regulations and retail requirements to all logistics providers and warehouses. If you get approval to reschedule deliveries, you must confirm it by email, and maintain that documentation in the event you get charged.
- You may want to reconfigure your logistics and delivery processes to meet your most important customers’ requirements. Work with your transportation carriers closely, as you need a cooperative, responsible and reliable partner.
- Make sure delivery dates fit into your production and supply chain schedules. Do not accept dates you cannot meet. Build-in lead times to assure you can complete the order. Negotiate with buyers so that the quantities and dates fit your capability, and if you have to reschedule, do it early.
- When needed, weigh the price of delivering late vs. not in full. It could be beneficial to hold off a couple of days to complete the order, especially if you have a great on-time history. Remember, always ask the customer for a waiver.
- Use the retailers portal to stay on top of your scorecard, so you can take active measures to fix processes, negotiate for some flexibility, and stay a preferred supplier.
- Collaborate with your peers to exchange best practices for systems and to manage OTIF and the accounts receivable deductions that follow. The Retail Value Chain Federation is an excellent place to meet with your industry, as well as with your retail customers.
- Ensure your accounts receivable software is up to the task of processing, tracking, and reporting root causes of deduction profit leakage. You will be able to identify what is going wrong and recapture a more significant percentage of deductions than you did before. Good accounts receivable software can also determine what’s happening in real-time by automatically interacting with the portal so you get advance notice before you get hit with the actual deduction from a remittance at cash application.
- Fast-track deduction coding. Your accounts receivable automation should have automated processes to push OTIF deductions to the right people for immediate investigation, so you have a chance in the event the customer made a mistake.
- Suppose you are a manufacturer that has outsourced accounts receivable and deduction processing to an offshore BPO. In that case, you may be losing more in lost collectible deductions than you will ever gain in labor cost savings. Have a deduction post-audit done by a consumer goods deduction specialist to reclaim the profit losses.
- Retailers make mistakes, too, so when you get hit with deductions for OTIF charges or other vendor compliance penalties, research them carefully and then dispute and collect any that are not valid. If you keep careful documentation on approved order changes, you can reclaim your profits more easily.