The market reset that has emanated from COVID-19 has caused many companies to look for new ways to improve their profitability. Increasing sales has been “king,” but the cost to serve customers has been elevated as companies try to boost their margins. One important way to control and improve margins is to make sure that the sales organization does not over-promise the delivery service. Too often, to sweeten a deal or ingratiate themselves with the customer, sales folks will inflate delivery requirements when unnecessary (e.g., “same day, next day, first delivery, rush,” etc.). The result is higher delivery costs and/or missed expectations because the premium delivery service for a given order was not feasible. Changing the sales compensation plan to accurately reflect their margin contribution is a long and probably losing proposition. What can you do to create better delivery-promising behavior by the sales organization? Tackle the delivery promise during the ordering process.
Shortcomings of the Traditional Approach
The traditional approach has been to create order policies that allow your distribution network to optimize the delivery of orders that come. These policies are typically based upon standards like capacity during a specific time period and in a particular geography. The challenge with using standards is that they do not necessarily reflect the capabilities or costs of your distribution network at any given time. Maybe you can cost-effectively deliver in half the time stated by your policy, or your “expedited charge” doesn’t come close to covering actual delivery costs. In addition, you don’t want sales folks extending all of the premium delivery options because of the incremental costs and potential to overwhelm the distribution network. For example, there’s a very limited number of customers who can be the first delivery of the day—when these slots are gone, you must stop offering them.
A Proactive Approach to Delivery Promises
There is a huge opportunity to reduce delivery costs and improve margins by taking a proactive approach to delivery promises by using dynamic delivery appointment booking. Instead of taking the order and determining afterward how it will get delivered, your organization needs to provide the salesperson with the feasible and most cost-effective options available when the customer is ordering. This can include a range of premium and lower cost delivery options that the customer or salesperson can choose. The approach of “offering” instead of “asking” is incredibly effective. For example, companies that have taken this approach to the extreme by only providing one delivery option initially—the lowest cost to the organization—have seen customers take it 50% of the time. Steering customers to low cost delivery options is incredibly effective. One company cited a 26% reduction in mileage per delivery using this approach. Equally important is improving delivery feasibility by never offering delivery options without the capacity to cover them.
To make this approach work, delivery promising needs to be integrated into CRM systems to generate, in real-time, viable and cost-effective delivery options based upon the customer’s location and desired product mix, constraints of the delivery network, and existing orders. As sales folks are working with customers on an order, they can see, and even present, the options that have been economically scored to help maximize the margin of the order—even when there are multiple delivery service choices for the customer. It is a “win-win-win” experience as customers appreciate the proactive approach, the company maximizes profit on every order and the delivery organization knows it can successfully meet the delivery promise.
Distribution costs are set during the order process and now is the time to minimize those costs on every order. By shaping the delivery options provided to sales and customers during the ordering process, you can reduce your distribution costs and increase profits. The key is to provide delivery options that strike the balance between what sales wants and distribution can cost-effectively do.
How is your company proactively managing its delivery promises? Let me know.
As Executive Vice President, Marketing and Services, Chris Jones is primarily responsible for Descartes’ marketing and professional services organizations. With over 30 years of experience in the supply chain market, Chris has held a variety of senior management positions including Senior Vice President at The Aberdeen Group’s Value Chain Research practice, Executive Vice President of Marketing and Corporate Development for SynQuest, Vice President and Research Director for Enterprise Resource Planning Solutions at The Gartner Group, and Associate Director Operations & Technology at Kraft General Foods.