Bad data costs you money

Poor communication impacts manufacturers and distributors in the MROP industry segment.

by Robert Nadeau

An e-survey of manufacturers and distributors in the MROP industry segment finds that the costs associated with problems that occur as a result of poor communication are much greater than most people realize.

The research was sponsored by the Industrial Distribution Association and conducted by the Industrial Performance Group (IPG) of Northfield, Ill.

Manufacturers and distributors have long been aware of problems in their working relationships. Yet, research conducted by the Industrial Performance Group indicates that only three percent of manufacturers and distributors take action to eliminate these problems, primarily because manufacturers and distributors are largely unaware of the costs associated with these problems.  

Most accounting methods do not draw the distinction between activities that generate revenue and those that do not. As a result, the costs of problems get lumped into the overhead category where they are viewed as fixed costs rather than as unnecessary costs that can be reduced or eliminated altogether.

Further, when the economy was strong, people didn’t pay much attention to these problems because they were primarily focused on increasing sales volume and market share. Both are appropriate objectives for any business. However, findings from this e-survey show that much of this top-line growth didn’t make it to the bottom line.  

As the economy struggles to improve, manufacturers and distributors in the MROP industry segment are looking for ways to improve profitability. The elimination of these common and unnecessary costs is a good place to start.

Findings
Fixing mistakes, expediting orders, holding excess inventory, and waiting are the most common problems that drive unnecessary costs for manufacturers and distributors in the MROP industry segment. These problems indicate a major disconnect between the flow of information between customers, distributors, and manufacturers.

Accurate product demand information — point of sale data — assures that the right products in the right quantity get to the right place at the right time. However, 75 percent of survey participants indicate they DO NOT have access to high-quality demand information. Without this type of information, forecasting and inventory management become best-guess estimates. This usually results in too much or too little inventory in the channel. Too much inventory drives holding costs up and too little inventory drives up processing and handling costs.

In addition, 56 percent of respondents indicate they DO NOT have access to high-quality product availability information, and 64 percent indicate they DO NOT have access to high-quality delivery/tracking information.

In the absence of this type of information, it’s easy to see how the combined resources of manufacturers and distributors are being consumed by non-revenue generating activities as people look for, expedite, and then wait for inventory to get to where it is needed.  

The average yearly cost of these problems for manufacturers and distributors is 2 percent of gross sales. This number can easily go undetected from a top-line perspective. However, the bottom-line impact is much greater. For example, if your net margin is 5 percent, these unnecessary costs amount to 40 percent of your bottom line. If your net margin is 10 percent, these unnecessary costs amount to 20 percent of your bottom line. The magnitude of this problem increases when you consider that both manufacturers and distributors are losing money due to these unnecessary costs.

Time for action?
Does the cost of these problems justify taking action?

That depends on how much of this money manufacturers and distributors want to put back on their bottom lines.

No matter how you calculate it, these unnecessary costs are much greater than most people realize. Yet these costs can be reduced or eliminated with a little effort.

The hardest part of this process will be changing the way manufacturers and distributors in the MROP industry segment view and manage their working relationships.

In today’s environment, taking action to improve the working relationship can be the difference between increased profitability or just getting by.

Robert Nadeau, managing principal of the Industrial Performance Group, will present the complete findings of this survey Nov. 23 at the I.D.A./ISMA Fall Convention in Chicago. He can be reached at (800) 867-2778 or at rnadeau@indusperfgrp.com.

This article originally appeared in the I.D.A./ISMA Fall Convention 2002 issue of Progressive Distributor. Copyright 2002.

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