This is Part 5 of "Shifting Profit Drivers," a periodic collection of essays

After reading Part Four of my Shifting Profit Drivers series on The Cost of Mistakes, a dealer wrote regarding the cost of returns: “I can’t imagine the cost of sending something ‘just in case’ it’s needed and having a return policy with no consequences. In many cases, the amount of material is being ordered by the dealer salesperson. As there are no consequences, it’s no skin off of him or her.”
I agree that if the salesperson has no consequences, they have no skin in the game. Many dealers have addressed this issue by reducing sales commissions for returns, only to discover the salesperson then deliberately orders the bare minimum—or less—and now quick-ship fill-ins are required. That’s costly, too.
Salespeople are smart—that is why we hire them. They find a way to make our “rules” work for them. Therefore, the issue here for you isn’t to isn’t to carp about returns or quick-ships; it’s to figure out how to be paid for both.
Our industry figures inbound freight in the cost of sales, but not outbound freight. For most dealers, the cost of a specific delivery or a specific return is a black hole. No two deliveries or returns are alike, making it impossible to establish the kind of fixed price that is common with inbound freight.
Dealers know they need to address this issue, so some dealers have established formulas based on:
- The number of trips to a jobsite;
- The number of stops a truck makes;
- The dollar value of the order;
- The size of the truck; or
- A combination of these.
Assumptions are required in all of these. While this approach may provide a reasonably accurate picture at the macro level, it doesn’t provide micro-level actionable information for a specific delivery or for a specific customer.
There will always be quick-ships, there will always be returns, and there always too many deliveries to certain builders. The only solution to this issue is to know the actual cost to serve a specific customer or a specific job, then determine the actual gross margin.
Once the actual gross margin is known, two actions can be taken. The first is to pay commission off of actual gross margin. Doing this means salespeople now have skin in the game. The other is to have management review the actual gross margins and determine future pricing strategies for each customer.
I have gotten used to hearing pushback to these ideas. “If I raise the builder’s price, they will go to the competition,” the typical complaint goes. My response is your competition is not going away, so why not control where builders do business? Let the competition have the high cost to serve customers and you take the low cost to serve customers.
To understand cost at the micro level requires software support. Some of the industry software companies provide this support, so check with your provider. I am aware of two industry-specific products that will interface with most of the industry systems as well.
Previously in this series:
1. Want Higher Profits? Start Thinking More About Logistics.
2. How Efficient Is Your Operation? Find Out With These Benchmarks.
3. Lots of Dealers Drive Trucks Until They Collapse. That's Wrong.
4. Errors Cost You 10 Times More Than Doing Things Right. Here's How to Reduce Errors