As previously discussed, an order for a non-stock product often leads to unexpected losses. Appendix ‘B’ provides an example for two orders of SEK2,000, but one is for a stocked item and the other is for a non-stocked item. It is important to note that the order for a non-stock profit leads to a negative profit margin of -100%, whereas the order for the stocked product is actually profitable at 13%.
The extra cost of a non-stock order is so significant at SEK2,250 that it makes an order size of SEK2,000 unprofitable. Appendix ‘C’ provides an example for a larger order size of SEK160,000 for two different customers. Customer A’s sales are from three large orders of non-stock items and customer B’s sales are from 28 small orders of which 6 were for stocked and 22 for non-stocked items. Even though customer A’s orders were for non-stocked items, it had a higher profit margin than customer B who had more orders placed for stocked items. This illustrates the value of large orders versus small ones. Because each time an order is taken the company incurs handling costs, it becomes extremely important to focus on large items or to consolidate orders into one large one versus many smaller ones.
There are two very important lessons that can be learned from Appendices ‘B’ and ‘C’. The first lesson is that non-stock orders create additional costs that should be avoided if possible. Second, if the monetary value of orders is the same, customers that place a lower quantity of orders will be more profitable than customers that place many orders. Necessary steps and guidelines must be established for the employees to follow in order to effectively handle cases such as these. How to Handle Unprofitable Customers
Currently Kanthal is faced with two unprofitable customers with large sales volume. There is an opportunity for Kanthal to turn these unprofitable customers into profitable customers. Further investigation reveals that one of these customers is using Kanthal as a backup supplier for last minute orders. Analysis indicates that orders of this type lead to unnecessary non-stock costs for Kanthal. In this case, Kanthal should consider implementing a surcharge for orders that require an immediate turnaround.
This surcharge should be set so that it is sufficient to compensate for the additional costs incurred by rush orders. Furthermore, Kanthal should consider offering this customer some incentive so that they become a primary supplier. This will not only eliminate last minute orders, it will also reduce the number of non-stock orders. Kanthal should also offer their customers discounts for placing large orders. Given the significant charge associated with each order, it becomes very important to ensure that customers are placing fewer orders of larger values. Finally, if all efforts fail, Kanthal should focus its efforts on increasing sales volume for profitable customers and stop doing business with the unprofitable ones.