Last issue we talked about the costs of a mis-shipped order, in the interest of space we referenced a percentage of invoiced revenue as an estimated cost of error. With all the pressure we’re seeing in the industry to cut costs and run profitably I wanted to take a moment to review the real costs of a mis-shipped order.
Paul Hernandez-Cuebas
Tom the distributor ships out 50 orders per day. On average he has to change two of those orders to accommodate customer reported concerns, over time he sees that half of the errors are picking, packing or shipping errors (short ship, mis-billings, or wrong product) and the other half are outside of his direct control. On the surface it looks like Tom is running a reasonable operation with about a 2% (1/50) controllable error rate.
If we dig a little deeper we see that things are much worse than they appear and Tom’s company is hemorrhaging money. Here is why:
According to an Executive Overview on InsightU.org every time a product mis-ships you incur a number of these potential costs:
Lost Sales:
- Shipping errors irritate customers. They take it out on the sales force. Rather than selling, the sales force winds up apologizing and spending time and money trying to keep a customer.
- Inventory inaccuracies from mis-ships can lead to later lost sales
Higher Overhead:
- Customers frequently delay paying incorrect invoices … even if most of the invoice is correct.
- Picking up the incorrect merchandise and re-shipping the proper merchandise increases transportation costs, with "overnight" charges or even salespeople or other personnel making deliveries.
- Material handling productivity is reduced if merchandise shipped in error needs to be re-stocked and if the correct merchandise needs to be picked again.
- Issuing credits and rebills (debit memos) consumes administrative time and money. Some portion of one or more person’s salary goes to researching these errors and issuing the necessary paperwork.
Together these overhead items create an average correction cost of $75 per mis-ship. Putting that into real-world terms... Tom is spending $39,000 every year correcting mis-shipments, even worse half of that loss is directly under his control.
But Tom’s not done losing money yet, he’s only accounted for the Under-Shipments reported by the customer. What about the mistakes that don’t get reported because the customer didn’t notice, or because they were in the customer’s favor? You might be tempted to write these off as a wash but remember that for every 2 errors in your favor that the customer catches you on, there were probably 2 errors in their favor that they let slide.
These errors come straight out of your profits and can stack up to dangerously large amounts if you don’t regularly do inventory counts to catch them. If you want to make a quick estimate of how much revenue you’re wasting, total up value of all the goods you’re customers reported you mis-shipped or mis-billed, and divide it by your percent of profit pre-tax.
In Tom’s case he makes an average adjustment of $40 on each invoice he changes, which means it's a sure bet he has overshipped $20,800 ($40 x 2 x 260 days) worth of product and never thought about it till now.
As we started to say in this issue's title:
If you find 10 coins face up keep looking
and you'll probably find ten face down nearby.
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