Difference between OTD and Delivery Actualization

Most of the organizations have been measuring many KPI's related to delivery performance to the customers. Out of many measures, commonly used measures are  Delivery actualization % and Ontime delivery (OTD) %. 

Even though those measures are meant for delivery performance assessment, there is slight difference in the purpose and desirable behavior expected from those measures. In reality, both measures often interchangeably used and sometimes confused.

Given below some clarifications on both the measures (KPI's) and its purpose.

Delivery Actualization %:

This measure is calculated as follows

Delivery Actualization % = Quantity delivered / Quantity committed to the customer

for example,

the customer asked for 1000 pieces/month, and as an organization, you accepted to deliver 1000 pieces/month and if you delivered only 800 pieces/month, then 

Delivery Actualization % would be 800/ 1000 = 80 %

Likewise, for each customer, you can calculate and finally arrive at your average delivery actualization.

This measure will indicate your performance towards meeting the delivering commitment in terms of quantity.

Pl, note that this measure is not concerned about the TIMELINE.

This measure indicates your organizational INTERNAL CAPABILITY towards delivery commitment.

On-time Delivery (OTD) %:

This measure is calculated as follows for each customer

On-Time Delivery % = No of components delivered full qty ON TIME / Total no of components

For example, a specific customer has 30 components that must be delivered in full qty as per the timeline committed either as per PO or by 1-1 mutual agreement.

Out of 30 components, you might have met 25 parts delivered on the EXACT DATE  in full quantity as committed and remaining parts, you might have missed out on the DELIVERY TIME COMMITMENT. 

then , OTD % will be 25/ 30 =83 %

This measure indicates your performance towards meeting customer's requirements on time.

Pl note that in the above example, you might have delivered all the quantity by the month-end and might have achieved 100 % delivery actualization. But you missed the timeline (OTD) target.

from the customer point of view, your timeline commitment is also critical even though you met quantity commitments at the end of the month.

To sum up,

OTD is important from the customer perspective on the timeline

Delivery actualization is important from internal capability and loss of sales perspective.

However, as a business head, you must be sensitive to both measures of delivery even though the intention of each measure is different.

Customer is not interested in your inventory

In one of the client organizations, the team has kept two months' inventory worth of say 20 Lakhs to service the customer as directed. The client organization is supplying to one of the reputed, large scale engineering organization. The monthly avg billing is around 10 Lakhs, and the customer insisted the client keep a minimum of 2 months FG stock at any point in time. The customer made it as one of the key performance metrics for the client organization and advised to keep the customer updated on the FG inventory status periodically.

As I diagnosed with the organization, their overall average delivery schedule actualization to the all the customers around 60 % only, and the manufacturing plan is usually based on the urgency or followup by the customers daily.

We worked with the organization and identified the constraints in the casting process, and their OEE was also low as 25 %. Eventually, within nine months, their OEE started rising to 60 %, and the business head is also working on machine maintenance improvements, technology up-gradation, daily planning based on capacity rather than urgency, and so on. 

The above said customer 's order was being fulfilled at a 100 % rate every month, and the organization's business head felt that there was no need for keeping two months FG stock as the production capacity increased to deliver the order commitment every month. So, they reduced the inventory to the safety level of 15 days, and the customers' also getting the KPI dashboard periodically as usual. 

Things were moving smoothly. During one of the conversations between the customer's representative and the business head, the customer said that they were not particularly interested in insisting on minimum FG stock. Since their history of delivery commitment was not so good, for safer side, they asked on maintaining minimum stock. They were ok with the reduction in inventory norm as long as delivering on time.

The moral of the incident :

The customer is not interested or does not want to penalize the supplier for insisting on keeping a minimum level of inventory in the name of vendor managed inventory or warehouse stock etc. as long as the supplier has the capability and flexibility to serve them. Keeping inventory is only to protect the variation in demand or supply, not to penalize the supplier.

It is up to the small organization to be smart in the manufacturing process, capacity, and planning to avoid or reduce the inventory and prevent the customer from imposing any rule on keeping inventory!

Balanced focus on Value addition and Value creation

In most of the small, emerging organizations, the business head is comfortable in dealing with day to day routine management activities and some extent, in improving one side of the business, that is on value addition or effectiveness improvement initiatives. Nothing wrong in developing in operational capabilities, however in this process, the other side of the business, that is on value creation activities get back seat.

Value creation activities include customer pipeline development, new product development, or improving NPD activities, working on strategic initiatives.

As long as the existing customer gives sales order and business also grows along with a few customers, there is no problem for the business head and his organization. The real problem starts when the current customer slows down in their business due to the economic cycle or reduces the share of the business; the business head feels the impact directly in terms of low sales turnover, profitability and cashflow challenges.

It is always prudent and proactiveness to focus equally on value addition and value creation for both survival and sustainable growth of the business.

The balanced approach calls for the mindset to come out of the comfort zone of the business head during good times.

Maximizing profitability in emerging organization- a holistic approach

Irrespective of your external environment, you can maximize profitability in your business by looking at your opportunities holistically.I have given practical six approaches to improve the business profitability which we have tested and delivered result in our client base.

some of the approaches may be relevant to your business model as well

Hope you enjoy to watch this video clip and implement in your organization as well.

Maximizing profitability-a holistic approach 

Why must continuous Lead-Time reduction be the focus for a Business head?

From customer's perspective, Lead time is the time taken between customer placed the order for product/service and the time the customer received the product/service.

This lead time may be further broken down into supply lead time, manufacturing lead time, distribution lead time and so on.Those classifications are internal to the organization, and the business head must focus on to reduce the overall lead time continuously.

Why lead time reduction is an essential focus for the business/business head?

Lead time reduction is important from four perspectives.

1.Working capital & Finance perspective

2.Triggering sales & operations teams towards growth performance

3.Operational Efficiency perspective 

4. Customer's perspective

Let us understand from each perspective.

1.Working capital & finance perspective:

When the product/service order fulfillment lead time is more, the expenses incurred to cover the product/service till getting payment from the customer will also be more. The business gets the cash only when the product/service is sold to a customer and converted as cash.

For example, if the lead time is six months, business will get the cash only after six months. Till such time, the business has to fund for all the expenses like salary, material procurement, and other overheads, etc .that is working capital is required for six months..(Pl ignore, advance payment, credit times, payables, receivables, etc. as those are all tactic arrangements by the business)

If the business team reduces the lead time by three months, working capital required only to fund three months expenses.

Hence, if you have high working capital, one of the causes and solution approach would be a LEAD-TIME reduction of your order fulfillment.

2.Triggering sales & operations teams towards growth performance:

Typically entire organizations' speed depends on the PULL.For example, If lead time is six months and the order execution capability of 6 months, say one crore, then the organization can make only two cr as sales turnover annually. Based on the execution capability or capacity of the organization, the sales and marketing function also behaves and operates. Once the lead time is reduced by 50 %, say by three months, then organization capability is also increased to 4 cr as sales turnover. The point is when Operations engine pulls more, the other parts of the organization also pull more from the market or customer.

The business head responsibility is to understand this behavior and must focus on lead time reduction.If your organization sales turnover is stagnant, one of the reasons could be high lead time and complacent in the organization.

3.Operational Efficiency Improvement 

When the lead time is high compared to actual value addition time, it means, your product/ service is held up in the value chain as waiting or delay. This results in accumulation of inventory in the form of WIP, which sometimes leads to rejections/ rework, making the communication complex, storage, handling, manpower deployment and so on.

Also, your strategic decision on supply chain leads to high lead time in getting the raw materials and high lead time in reaching the customer .Typically when the lead time is high; it brings all the inefficiency or wastes in the system. When the lead time is low, it brings flexibility into your production system as you can move from " Build to stock" to "Build to order."Also, the change in your production system will reduce your inventory and its derivative wastes in the system.

If you are struggling with low efficiency in your operations, one of the causes could be high lead time

4.From customer's perspective :

In today's fast-moving lifestyle, the customer does not want to wait, and he is willing to pay more for quick delivery than negotiating and followup with your team on delivery dates.Less the lead time, more customer's satisfaction and there is possibilities of further business partnership.If the lead time is high and non-negotiable, there is a possibility of your customer move to the competitor.

In essence, as a business head, your continuous focus must be on reducing the lead-time either in supply chain or operations or distribution. 

This focus will give tremendous benefits in terms

1.Capability to increase sales turnover

2.Reducing the cost of the product

3.Reducing the working capital

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