Cost of Order Servicing

For any manufacturing company (or even a large trading company for that matter), one of the critical issues that needs to be managed is estimating orders that will flow in, for a given period, and accordingly managing raw material procurement, production and packaging activities. Ofcourse, today many companies outsource production to a contract manufacturer, but even in this case, production schedules and quantities need to be decided. Wrong estimation can result in an opportunity loss (where orders cannot be serviced), or huge inventories (where produced goods pile up).

No wonder then, that the salesperson, who has his ear closest to the ground, and knows what decisions customers are taking, is an important person in this chain. But one of the funniest things companies do, is to treat the salesperson as a sort of isolated figure, whose primary duty is to go out and evangelise. In these cases, the salesperson is evaluated mainly on the parameter of how much revenue has been generated. When the salesperson is under immense pressure to generate a monthly/quarterly figure which is the sole basis for assessment, no wonder that he/she forgets – that there is a cost to servicing every order.

This isn’t confined to manufacturing alone. Even in the service industry, in consulting for e.g., where I work – sometimes the pressure to generate revenue is so high, that it is tempting to sign up projects that one isn’t really confident of executing. The cost ofcourse is multiple – the team’s morale runs low as they cope with a project they don’t have the skills for; the project runs past its deadline eating up precious time that could have been spent elsewhere and the client is angry at the end of it all, and could end up bad-mouthing the company.

I think the way to control this is to make the salesperson responsible for not just revenues, but also aware of the cost of servicing orders that are generated. Costs could include

– Costs of customisation (does the order need to be separately catered for? If so, at what size is the added cost set off by the added revenue? Is it so small that it is much smaller than the company’s smallest production batch)

– Transaction costs (If the order is by a customer in a really remote location for e.g., will the customer pay the additional shipping charges?)

– Cost of collection (If the customer has a history of delaying payments beyond an acceptable limit)

If salespersons were to be evaluated on a number of factors including the cost of servicing their orders, they would think twice before taking up unviable orders. How may times have I seen back-end employees, like activation teams, supply-chain executives and production managers break their heads and exclaim that the order is just not worth the headache !

Companies put in sophisticated systems for material management, optimising inventory levels and automating production processes. But behind everything is a thought process as to which sphere does the company want to be in. Will it cater to high end customers willing to pay for exclusivity or service? Or is it in the business of the lowest-cost solution? Does it play to the organised or corporate sector? Or is its strength a diversified sales team catering to the small business owner or unorganised back-room operation? Clarity on these, and maintaining this in the face of sales pressures is essential. Too often, the pressure to show YOY growth may result in much earning, but little profitability.

In a company I once worked in, the management was faced with such a problem, and decided on not allowing in any orders below a certain limit, since production and supply of these really small batches was causing immense headache. After all, billing for a 15kg order is not significantly different from that for a 100 tonne order, though the revenues pale in comparison. Salespersons were duly warned not to take in any such orders, and even cautioned that any such orders taken in would not be serviced. Until – one such order was placed by a distant relative of one of the sleeping partners – and the company capitulated though salespersons protested ! I still wonder what message people on the field get when corporate bigwigs do the very thing they warn others against !

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3 Comments

  1. remember what our friend from Delhi uses- “Estimate the Deal Value!!”

  2. yeah – though “real” value is often lost in the tumult of immediate revenues…

  3. […] who try to do too much in an attempt to be that superwoman. I also have a piece featured here, on the costs of order servicing, and why employees, sales in particular, need to be trained to look at […]


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