Special Orders

Special-order items have caused distributors headaches for years. When customers want to buy items that are not part of an electrical distributor's normal stocking inventory, the distributor should treat the ordered item as truly “special.” The reason is simple: Special orders need to be tracked differently throughout the entire sales process to reduce the risk of that special item becoming dead stock.

Satisfying customers in an ever-changing marketplace has become more difficult for distributors over the past decade. Along with the products you chose to carry in inventory, there is increasing pressure to source more special-order items. The new world order of international business is changing your inventory mix, too. Carrying just a few lines and knowing those lines very well is no longer acceptable. You need to be able to source and outsource products and services just to stay in the game.

In some ways, special orders have gotten easier. For electrical distributors, finding and purchasing special-order items on the behalf of a customer is a much simpler task for inside sales because so many suppliers' catalogs and product offerings can be accessed electronically. Product availability, expected delivery date and competitive pricing on the same or similar items can be found on the Internet.

The distribution industry has become a world of special-order items and nonstocks, rather than a true turn-and-earn distribution business. Nonetheless, special-order items are not part of your normal usage and therefore need to be highlighted as being special.

Let's look at what it takes to execute a special order for a customer:

You source a product for a specific customer's need. You present multiple options regarding vendors, pricing, delivery and functionality. Your customer is impressed by your research and gives you the go-ahead to purchase the product. In addition, your staff investigates every aspect of how the product works, what it can do, how to operate it and all the safety issues related to its use.

You build customer loyalty because the customer now better understands the true value of the customer-distributor relationship. You have once again separated your company from the competition simply by using the technology, education and people investments you've made over the years. You have answered the question every customer asks: “Why should I buy from you instead of your competition?” You provided world-class customer service through product sourcing and delivery, and you added a few extra dollars to your gross margin on the special-order item sale. (You did add to your gross margin, didn't you? On special-order items, electrical distributors should have a predetermined minimum gross-margin percentage.)

Look at all the things you did just to execute the special order. It's much more than just sourcing the products. You've invested a great deal of time and effort learning about the product, vendor, specifications and proper use of the product. Those value-added services are not free to the distributor, so how will you be compensated for this investment you've made on behalf of your customer? The answer is this: You need to establish a minimum gross-margin percentage on all special-order items.

In addition, you need to put a few other requirements for special-order items in place.

• Get partial payment up front to further solidify the customer's interest.

• Consider a no-return policy on special-order items.

• Get the customer's commitment in writing before you start the process of securing the product.

• Don't forget special delivery costs you might incur with the product. How will you charge for those additional costs?

• Consider sending acknowledgements to customers outlining their total cost on special orders. It should cover your total investment with an acceptable markup.

Customers should be fully aware of what they need to pay for special-order items. If this does not happen, the distributor often eats up the additional gross margin achieved in the special-order item pricing with the hidden and unknown costs of product handling. Special-order items require thorough understanding by the distributor of what costs they might incur because the item is special.

Let's take a look at what happens when a distributor botches the handling of special-order items. What about the special-order items that don't end up in the customer's hands? You know the ones — those that were ordered for a customer without any real commitment. You get the product, notify the customer that it's in, and the customer tells you he no longer needs it. Or you have the order, and the customer tells you it's not what he expected.

And what about those phantom special-order items that no one knows about, but someone finds during cycle counting? The item came in without a tie to a customer-specific order. It wasn't marked as special when it was ordered. Receiving did not know the item was special and just put it in the warehouse, not knowing what else to do with it.

Special-order items need to be identified as special-order items from the moment they are ordered. Use the fields in your software designed to label them as such. Don't lump them into the dangerous product class called “class 99,” which some distributors use for nonstocked items. They assign all special-order items an item number of “9999” at order entry because it's easier than setting up a special-order item in the inventory master file. This can be disastrous.

Distributors take a risk just by ordering special items, so why not go the extra step and set up the items properly at the time of order? Mark them in the inventory master file as special-order items. You may want to set aside some product numbers that can be assigned to special-order items only. You may want to use an asterisk to mark them as being different. Whatever you do, make them special in your inventory tracking system because they are special.

Without these additional steps with special-order items, the potential for recouping the dollars a distributor invested in the item diminishes greatly if it's not sold to the original customer it was ordered for. As mentioned, special-order items are often found during cycle counting. Once found in the warehouse, anger and anguish become the norm.

The following questions are common when discovering dead-stock special orders:

• What is this?

• Who bought this?

• Who was supposed to get this product?

• What are we going to do with it now?

Cycle counting is the wrong time to ask these questions.

If the product is marked as special from the get-go, it can be tracked easily from the time of order to the time of payment.

If you treat it like any other “9999” product and just hope it all works out, you have lost the “specialness” of the special-order item. If you are going to deal in special-order items, treat them as such — very special and very carefully.

Scott Stratman is president of The Distribution Team, Colorado Springs, Colo. He consults with distributors on improving net profit and has been a guest lecturer at many national and regional distribution industry events. Contact Stratman at (719) 597-5978 or via e-mail at [email protected]. Web site: www.thedistributionteam.com.

Main Points for Special Orders

To reduce the risk of special orders becoming dead stock and to reap the maximum profit reward from special-order items, don't forget the two main points from this article:

• Establish a minimum gross-margin percentage on all special-order items.

• Special-order items need to be identified as special-order items from the moment they are ordered. Use the fields in your software designed to label them as such.

To further solidify your special-order investment, consider taking the following actions when it comes special orders.

• Get partial payment up front to further solidify the customer's interest.

• Consider a no-return policy on special-order items.

• Get the customer's commitment in writing before you start the process of securing the product.

• Don't forget special delivery costs you might incur with the product. How you will charge for those additional costs?

• Send an acknowledgement to customers outlining their total cost on special orders. It should cover your total investment with an acceptable markup.