Your Sales Folks Are Costing Your Company Money!

If you are a B2B company looking for new ways to improve your operating margins, then this issue is the proverbial “elephant in the room”. You see it every day when sales folks consistently inflate delivery requirements (“same day, next day, first delivery, rush”, etc.) when you know from experience that customers do not need that level of service. From a company perspective, you know that your company’s profit is impacted because delivery costs are higher than they need to be. As long as sales folks get evaluated on revenue, they will continue to act that way. Changing the sales compensation plan to accurately reflect their margin contribution is a long and possibly losing proposition. So what can you do to create better sales ordering behavior? Tackle the delivery promise during the ordering process.

You may already know where your current delivery promise policies and practices are killing your margins. If you don’t, “cost to serve” analysis is a great way to determine the impact of existing delivery promise practices to the “bottom line”. It is a real opportunity for “big data” applications and one of the reasons you need a TMS or fleet management solution to generate the granular data to determine where your company needs to change its customer service and order policy practices. While this will give you an excellent view of what you should do, it doesn’t necessarily turn into action with the sales force unless you have some way of enforcing it.

The traditional approach is to create order policies that allow your distribution network to optimize the delivery of orders that come. These policies usually have standard lead times and assessorial charges that are intended to get control of the situation. The challenge with the “standard” approach is that it does not necessarily reflect the capabilities or costs of your distribution network at any given time. Maybe you can cost-effectively deliver in half the time that your policy states or that your “expedited charge” doesn’t come close to covering the actual delivery costs.

The big opportunity to reduce delivery costs and improve margins is to take a proactive approach to delivery promising. Instead of taking the order and determining afterward how it will get delivered, your organization needs to offer delivery options to the sales person, and ultimately the customer, that are consistent with the delivery costs and margins your company wants to maintain. Yes, there will be times when you legitimately need to violate that approach, but it should become the exception, not the rule. However, you will be amazed how many customers will take your options if you present them and this can include assessorial-based expedited options. In addition, you will improve your on-time delivery accuracy because the only times you will offer will be ones you know you can do. I have seen this work in retail where one retailer reduced the miles per delivery by 13% by offering delivery choices that helped contain costs. This approach is also evolving in distribution- and service-based organizations where logistics costs are such a high percentage of overall costs.

To make this approach work, distribution needs to go from being a “back office” function to customer facing. Delivery promising needs to be integrated into the sales processing systems to, in real-time, providing viable and cost-effective delivery options based upon the customer’s location and desired product mix. To successfully sell this approach to your company, you need to start with the folks that own the P&L, the CFO and president. Sales does need to “buy in”, but it is unlikely that they will jump at a solution that they feel constrains their ability to close business – at least in the beginning. From a technology perspective, this approach may cause you to rethink some of your distribution solutions. If they are not able to provide an integrated view of capacity and costs in real-time, it’s time for them to change.

Distribution costs are set during the order process. If you want to squeeze more margin out of your business you need to change your reactive approach to delivery promising. By shaping the delivery options provided to sales and customers during the ordering process you can reduce your distribution costs. The key is to provide delivery options that strike the balance between what sales wants and distribution can cost-effectively do. How is your company proactively managing its delivery promises? Let me know.