Mistakes and omissions

Why some systems are decreasing customer service, margins and inventory profitability

by Dick Friedman

Some distributors have spent a fortune on new systems, only to discover months later that the business performance got worse, not better – or at best, didn’t increase. Other distributors have been using the same systems for many years, but still aren’t getting “the numbers” they want, and wonder why. This article looks at a few functional areas where mistakes and omissions are depressing customer service and profits.

Matrix Pricing. Distributors that have recently set up new systems with the same matrix settings that were in the old systems, and never changed them, are leaving money on the table. And distributors that have older systems but don’t regularly review and revise matrix settings are also losing out on some profits.

Even the largest customers should not be given the largest discount or smallest markup on all items they buy. Almost as bad for profits is giving the best deal on all the items in a family or grouping. A price should depend on several factors, including the “real % GM” for an item and customer. Real % GM is the traditional % GM adjusted for costs of doing business (such as free or subsidized delivery). Fine-tuning matrix pricing usually results in increased gross margin revenue – which should be the growth objective, not increased sales.

Inventory Management. Mistakes made in entering data about customer returns or exchanges could impact the level of inventory, and perhaps the level of customer service for the items in question. Many different kinds of mistakes involving data entry can easily be made, so one step to improving inventory levels is to install procedures and controls to minimize those data entry mistakes; and detect and correct them before they impact inventory data.

Another kind of mistake that impacts inventory is accepting vendor deals without calculating the financial impact of the deal, and the impact on warehouse operations.

Another import task that gets back-burnered to time pressures is the maintenance of various system parameters that affect the accuracy of system-calculations, such as forecasts. Other important parameters determine whether the system should even make a calculation; economic order quantity (EOQ) should not be used for some items. Key parameters should be reviewed/revised quarterly; especially those that affect all items, all vendors, etc.

An important task that many users don’t know about is the review of sales data that will be used by the system to calculate purchasing requirements. Even though most systems do some filtering of data oddities, no system can clean up all distortions in data.

Warehouse Operations. Data mistakes made in the warehouse (e.g., incorrectly entering a substitution) can have a bigger impact on the level of inventory (via automatic purchasing functions) and perhaps customer service than those made in the front office. Here too, procedures and controls are needed to minimize data mistakes and detect/correct those that do occur. Procedures and controls are also needed here to minimize product-related mistakes, such as putting a received item in a wrong slot. But unlike the office, this is a place where advanced technology can be used to drastically reduce the level of errors.

This article originally appeared in the May/June 2008 issue of Progressive Distributor. Copyright 2008.

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