Thursday, September 23, 2010

No company makes money on special orders

No company makes money on special orders. If a customer calls you and asks for a product that you don't stock, the best P&L decision you could make is to hang up the phone as quickly as possible.

Estimated costs of processing a purchase order vary between $50 and $300+ dollars. Lets use the low side of the range and assume a PO will cost your company $100. Even at 50% margin that means you should refuse all special orders under $200. But what if I combine it on another PO? Ok, what if the customer returns or refuses the item? Will you be able to return it to the vendor? Will it wander around your warehouse with no bin home until someone finally throws it away?

So I have come to the conclusion that the special order department should be a cost to the sales department. They are the only ones that have anything to gain from special orders through customer loyalty. If special orders are really important to your company, I am sure your salespeople will not mind the reduction in commission to fund the special order department.

While you are making changes in special orders, do some analysis on which customers use your special order service the most. Are they your best customers in sales and margin dollars or are they cherry picking you for your product research specialists?

In summary, I would like to stress the importance of tracking special order sales and costs separate from normal sales. Each sales order and PO related to a special order should be identifiable. In Dynamics GP, the sales orders should have a separate document ID and PO's should be committed to these orders. Use allocation accounts to apply shared expenses to the special order department to get a real picture of how much this service costs you.

1 comment:

  1. I really appreciate your post and it was superb .Thanks for sharing information.