15 May 2013
Imagine the scenario:
You are frustrated.
You have been second in charge of the purchasing department at a medium-sized shipping company (FleetCo) for the last six months. Your boss, the technical director, has just been in an uncomfortable meeting with the firm’s commercial director. The commercial director stated bluntly that FleetCo’s fleet of chemical tankers were spending too long in port waiting for deliveries. And that’s the technical department’s area of responsibility.
Your boss, has now come down hard on you to provide the evidence that this is not the case. He needs it for a crisis meeting at 9.00am tomorrow with the company’s CFO and CEO, both of whom are worried about margins.
It’s 4.30pm just now. you’ve got a long evening ahead.
You are beginning to really hate this job…
If your company is a ShipServ TradeNet participant, you can easily and quickly find answers to some of the questions your boss needs to know, questions like:
- How many suppliers respond to our RFQs and how long does it take them?
- Are we always delivering spares and stores on time during port calls?
- Do we ask for at least three quotes per PO?
- Do we receive enough quotes on our RFQ’s to make sure we are able to source in a timely manner?
- Are our suppliers responding in a timely fashion or are we creating problems by asking for too rapid a response to RFQs?
- Are we using the right suppliers? Do they respond at all?
- Do we take advantage of the latest tools in our supply process – are we using e-commerce and to what extent?
- How are we doing compared to the rest of the industry?
ShipServ’s been making available the data that answers questions like that for the last 11 years. We call it our Key Performance Indicator (KPI) dashboard and you can see one below (with dummy data). Used properly it can be used to improve any company’s ship supply operations, as well as its relationships with its supplier partners.
E-Enablement Status: this figure is the total number of purchase orders through TradeNet divided by the total number of orders per ship as reported by the shipowner/manager. Useful in seeing progress on getting electronic trading going with your suppliers.
Supplier Response Rate: this figure is the number of supplier responses to all RFQs divided by the number of RFQs themselves. The number may be below 100% because
- Invited suppliers may not stock the items requested or supply the requested ports.
- The supplier has chosen not to respond to RFQs from this shipping company – they may not be good payers or the supplier may believe that it has no chance of winning the business or the order is too small
- The RFQs have too short a response time due to bad data quality, the fact that the RFQ was sent over weekend, the supplier is simply too busy etc.
RFQ to PO Ratio: Shows the total number of RFQs issued in the period compared to the number of POs issued in the period. Ship owners will need to drill into the data to find the balance between on-contract and off-contract transactions. This will ensure sufficient RFQs are sent out.
Run Rate: The annualized number of POs per vessel sent via TradeNet. This number depends on the E-enablement status and the Line items per PO.
Line Items per PO: As with the response percentages, the absolute number for this KPI is less important than the improvement over time. However, this can have as large an impact as unit prices for the lower value items because each PO carries a fixed overhead cost (including handling the invoice), believed to be between $50 and $150 for each PO.
KPIs are very helpful, but they have an important limitation – they operate in a vacuum. Benchmarking compares the performance of a company (i.e., its KPIs) against those of similar organizations or internally between business units. It’s a useful tool that can help make a company more competitive while providing an objective picture of the business’ strengths and weaknesses.
In the table above (Click for full view) we have expanded the KPI Dashboard to include industry averages (using example data only). What we can see from this data is:
- FleetCo is at a high level of e-enablement, but there’s still room for improvement. Why are the remaining 24% of suppliers still not trading electronically?
- The supplier response rate is close to the average, but still way below what is achievable by best in class.
- The percentage of one day turnaround for quotes is just below the average, but again way below best in class.
- The RFQ to PO rate is slightly below the average.
- The number of Line items per PO is fairly low leading to the issue of more POs than average.
The data for this type of benchmarking is based on transactions from almost 8,000 vessels in the period. In 2012 over 175 ship owners spent more than $2.1 billion purchasing marine supplies via TradeNet.
KPIs and benchmark statistics like these help identify and correct weaknesses in critical business processes before they are noticed. But they are, astonishingly, under-used in the shipping industry, where by tradition many business processes remain manual and paper-based ones.
Moreover, there are widespread cultural barriers that prevent marine purchasing managers from using KPI dashboards. This is an industry where purchasing managers believe that their problems are unique to their company and that precious little can be learned from the actions and activities of others.
We’re absolutely convinced that this attitude is wrong and over the next few months, we’re going to be investigating several different aspects of our KPI and benchmarking data to show how they can improve business processes and overall performance.
In our next newsletter, we’re going to spend some time analysing the importance of understanding RFQ response rates, but before then here are some questions for you to think about:
- Do you know how many responses you get to your RFQs compared to the number of RFQs you issue? Is it a low response rate or a high one? How do you establish what is low/high?
- If you think your response rate is low, why is it? Are you sending your RFQs to the right suppliers, ones who can provide the equipment you need in the places you need it?
- Are you truly being “fair”? – i.e. do not actually favor certain suppliers despite the results of the quote phase (and, btw, if that’s the case why not enter a contract and stop RFQ’ing!).
- Are your deadlines for quote submission reasonable? Or are they too short?
- Is the data you provide on your RFQ insufficient or inaccurate such that it prevents a supplier from responding appropriately?
By knowing your RFQ response rate, you will be in a much better position to improve the rate because you’ll be able to analyze exactly where the problem lies. And better rates of response hold out the prospect of better prices.