August 16, 2005
Volume 1 Issue 23     

Cutting Order Costs Saves Money on Every Order.  

In previous issues, #’s 2, 18 and 20, we have talked about ABC (Activity Based Costing). A key area to look at is the cost of taking and fulfilling an order. We are going to dissect this activity in this issue and hopefully discover the key areas that will help us establish our real costs and then drive then down.

The 2 main areas of cost in establishing order costs are:

• Order taking (Customer service)
• Order Fulfillment ( Distribution center)

Order taking is the front end processes, order filing is back end processes. Roughly speaking the cost per order is equally split between front and back end processes. Fifty percent of your costs are labor direct costs, which does not include supervisory labor or benefits. So, the obvious answer here is productivity. If you can increase productivity without losing accuracy you can make a major impact on that labor component.

The industry average cost of a two line order is $7 to $10 dollars per order. Determine your cost per order and compare. Remember their must be full tracking of all costs from when the phone rings or the fax is received.

Since labor cost is the key component, let’s look briefly at the four major key elements that can effect productivity.

The four key elements to increasing productivity are:

1. Improving the process (reducing unnecessary steps; streamlining procedures and work flow; adding equipment or computer systems that help operations);
2. Increasing work pace by reducing delays (making sure product is available in primary slots for picking; cutting picker travel time by keeping high-velocity items in one place; stocking enough boxes and packing materials);
3. Increasing volume handled; and
4. Improving the quality and quantity of initial and ongoing training.

It's also essential to improve inventory forecasting and management. When merchandise isn't in stock to be shipped when the customer places an order, this directly hurts your bottom line: Each backorder costs you roughly $7-$12. (This reflects the total cost in both the order taking and the distribution center.)

Let’s learn our costs and improve on them. The simple math of a 10% reduction of cost per order saves you at least $.70. At 100 orders a day that’s 70 bucks a day or $1,400 dollars a month. That could help your bottom line, but the real good news is the more orders you do, the more money you save.

MOVE THAT COST SAVING SNOWBALL DOWN THE HII AND KNOW THY COSTS

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