Tough Call: The high cost of special order mistakes
Like LBM dealers in most U.S. markets, your company is doing well. Sales are up, margins are stable, and your team is working at near capacity. At this point, it appears that your company’s growth—like the builders and remodelers you serve—is limited only by the shortage of good people. Given that reality, you’ve decided to focus on making sure that your company is operating as efficiently as possible.
You’ve decided to let your recently upgraded computer system help justify its expense by generating the kind of in-depth management reporting you’ve never had access to before. After getting over the initial information-overload factor, you’ve found a few areas that, with a little tightening up, have potential to make a big difference in profitability. The area that’s demanding your immediate attention is special orders.
With your customer base of remodelers and custom builders, special orders are a key part of your business. When the market was down, and employees knew that there was little margin for error, mistakes on special orders were kept to a minimum. Now, with the market on fire, and your salespeople writing up orders as fast as they can, the opposite is happening. There are problems with a far bigger percentage of special orders than ever before.
Since your company has a longstanding policy of not requiring established customers to prepay for special orders (neither in part nor in full), the result is that your company eats those mistakes. Just last week, an order for custom windows came in that was the wrong size and shape. It turns out that the builder didn’t measure, he just told the salesperson to work from the blueprint. As it happens, it wasn’t the latest blueprint—so you’re stuck with four oversized angle-top windows with a retail value of nearly $8,000.
Oops. You’ve decided that that can never, ever happen again, so you put a rule in place that special orders must be paid in full before the order is placed with the manufacturer. That way, if there’s a mistake, you’re not responsible. You figured that there’d be a little pushback. But you had no idea.
The backlash was fast and furious. “Why do you no longer want our business?” your biggest customer demanded to know. “You know how much business we do with you, and how much of that is special orders. We can’t possibly prepay for all of our special orders. If this is how it’s going to be, we’ll be taking our business elsewhere.” That was just one example of the conversations that consumed your next few days.
You called a meeting of your salespeople to talk this through. “We went from an error rate of less than 2% to nearly 10% on our special orders,” you explained. “Since we don’t require prepayment, these mistakes are costing us tens of thousands of dollars. This isn’t sustainable.”
“It’s not our fault,” the salespeople reply. “We take the builder’s word for it when they place an order, and we don’t want to insult them by checking all of the measurements. And we’ve never required prepayment—so that’s why they’re pushing back. We don’t know what to do.” What would you do?
|1. Stay strong. Prepayment in full on special orders is how they do it in other industries, and it only makes sense. If your sales take a temporary hit for this, so be it. They’ll be back.
2. Bend a bit. Instead of requiring full prepayment from existing customers with a good track record, charge a deposit. That way you’re sharing the risk. They should accept that.
3. Measure. Your salespeople are paid on the products they sell, so it’s their job to make sure they fit. Train them on proper measuring techniques, give them the tools, make them take some ownership.
4. Work it out. Sit down with your customers, explain that you can’t afford the cost of custom-order mistakes. Ask them to work with you to come up a solution that works for everyone.
See how your judgment compares with others in the industry at LBMJournal.com.