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Rapidly rising expenses, on-going price competition and pressures to expand customer services. "All of these profit challenges are external to the firm," writes Bates. "That is, they are caused by factors outside the firm's control."
However, according to Bates, some of these "profit wounds" are self-inflicted. Companies have not given as much attention as they should to internal ways of offsetting the expense and margin pressures.
"In particular," Bates writes, "they have not taken the time and effort to ensure that the basic economics of each transaction are sound. In short, most firms are processing too many small, unprofitable orders. Such an internal focus demands treating the average transaction size and its components as factors that can be planned and controlled by the firm.
"The neglect of these factors arises because most executives view order economics as uncontrollable. Customers order the products they want in the quantity they want at the time they want them. Firms with a strong customer orientation not only respect customer ordering desires, they support them enthusiastically.
"However, such a view abdicates decision making in an area that has a major impact on profitability - the workload required to generate a given level of sales. It would be beneficial for firms to identify how they can improve order economics while continuing to give customers as much ordering latitude as possible."
Bates' report goes on to examine order economics in detail, by focusing on three key issues:
- Current order economics
- Transaction planning
- Transaction management
For more information contact NHRAW at 614-488-1835; fax 614-488-0482. Refer to Profit Improvement Report Vol. 9, No. 4, November 2000.