You're Only As Strong As Your Weakest Link
Product Mix vs. Customer Service vs. Profitability
Most companies that we visit have to cope with determining which products to stock to keep their customers happy and what would happen to both their competitive position and profits if they did not stock all items their customers could possibly want. What we often see when we visit those companies is distribution centers in which over 50% of their space is filled with products that sell poorly and overstock on most of those products as well.
We can calculate the cost of the extra warehouse space required to stock those products, the cost of labor to traverse the extra space, the extra cost of mobile equipment to support the extra labor, common costs to stock extra items and product lines, and the cost of storage equipment to hold the product. We can also measure how much slower it is to pick and ship orders in a footprint that is way too large and the negative effect of this on customer service.
What most companies cannot, or do not do is measure the value of stocking those items vs. the extra costs noted above and bottom line profitability. Would you rather be everything to everybody or be more profitable? Pareto’s law applies to customers just as it does to inventory and in most cases 20 – 25% of one’s customers account for 75 – 80% of a company’s sales. So we are recommending that a company determines who their best customers are and determine which if any slower selling items they buy.
Two courses of action are then available. One can stock “C” items for “A” customers only - do you really want to stock “C” items that only your “C” customers buy in light of the extra cost of doing this? One can also offer stocked and non-stocked items; again the non-stocked items would only be the slower moving ones the better customers want. Product lists provided to customers would list both stocked and non-stocked items separately. The variable cost to provide these items when and if ordered would increase, but most often would be considerably less than the total of the fixed costs listed earlier.
We can calculate the cost of the extra warehouse space required to stock those products, the cost of labor to traverse the extra space, the extra cost of mobile equipment to support the extra labor, common costs to stock extra items and product lines, and the cost of storage equipment to hold the product. We can also measure how much slower it is to pick and ship orders in a footprint that is way too large and the negative effect of this on customer service.
What most companies cannot, or do not do is measure the value of stocking those items vs. the extra costs noted above and bottom line profitability. Would you rather be everything to everybody or be more profitable? Pareto’s law applies to customers just as it does to inventory and in most cases 20 – 25% of one’s customers account for 75 – 80% of a company’s sales. So we are recommending that a company determines who their best customers are and determine which if any slower selling items they buy.
Two courses of action are then available. One can stock “C” items for “A” customers only - do you really want to stock “C” items that only your “C” customers buy in light of the extra cost of doing this? One can also offer stocked and non-stocked items; again the non-stocked items would only be the slower moving ones the better customers want. Product lists provided to customers would list both stocked and non-stocked items separately. The variable cost to provide these items when and if ordered would increase, but most often would be considerably less than the total of the fixed costs listed earlier.
Roy Strauss is President of the Strauss Consulting Group, a supply chain logistics company that specializes in helping companies increase profits and customer service while reducing costs. For additional information, please go to www.scg4u.com.
Email: rs@scg4u.com
Office: 1-201-337-7108
Corporate Web Site: Strauss Consulting Group
Web 2.0 Community: Supply Chain Experts
Tags: 2.0, , Tags:, Web, >:, >Distribution, >Logistics, >Strauss, >Supply, >Warehouse
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