Think Twice Before Accepting Special Orders

Customers often approach distributors and ask them to stock an oddball item that currently is purchased direct from manufacturers. The distributor, without thinking twice if the move makes financial sense, will go out and stock the particular item to appease the customer. Reality quickly sets in after reports show the particular item is actually costing the distributor more than it’s worth, even if customers are happy because they are paying less. Add several more requests like this and the specially stocked items and the losses from them can quickly get out of hand.

“Distributors don’t ever question the wisdom of the customer’s buying habits and some customers just have bad habits,” says Merrifield. “If you look through the net profitability lense, you’ll find that you cannot buy these special stock items from a master wholesaler, receive them, put them in stock and pick them out at the same list price as the customer could buy from the manufacturer.”

Most special stock items are net profit losers for distributors. Since salespeople are often the ones responsible for bringing in special stock items, distributors may want to hold them accountable.

“The salespeople are highly motivated to put everything in stock, and they are a great source for information,” says Ambrose. “But the salesperson needs to be accountable for putting things in stock, and often they are not.”

To cut down on unwanted items filling the shelves, distributors can pay their sales reps an incentive based on the net-profit of accounts.

“Give them deep-dive, line-item profit analytics for each customer,” says Merrifield. “Find and rectify the existing unfair savings/cost splits.”

This can help prevent bad deals in the future and discover other hidden buying inefficiencies in customer relationships.

“There are one-plus-one-equals three opportunities in providing special stock services,” says Merrifield. “You just have to make sure that the total benefits are calculated and the total incremental costs are calculated and the benefits are shared equally.”

In order to be compensated for the added-value investments made to bring in a special stock item on behalf of a customer, distributors should establish a minimum gross margin percentage on all special order items. Getting a commitment in writing from the customer before securing the product is also not out of the question. Send out a special item order acknowledgement to the customer outlining the total cost that covers the total investment with an acceptable markup. Customers should be aware of what they need to pay for special order items. If this doesn’t happen the distributor often eats the additional gross margin with hidden and unknown costs of product handling.

Implementing better business practices for both inventory control and inventory management will keep warehouses running efficiently. And the smarter stocking decisions will ensure money isn’t tied up in unwanted products. 

Nick Bragg is a freelance writer in Milwaukee. He is the former Deputy Editor of Sanitary Maintenance.