In my last column, I recounted how Cavallo co-founder Pete Eardley pulled his own distribution business free from an information “black hole”: Before Pete created Cavallo’s flagship software, the progress (and ultimate profitability) of orders was trapped in an information vortex from which no data could escape.
Getting out of a black hole is just the first step, however.
This week, I’d like to address the next step toward operational control: quantifying and managing the variables to achieve perfect orders every time.
At Cavallo, we compare this challenge to a Plinko game. Remember Plinko? As popularized on “The Price is Right,” Plinko promises contestants up to $50,000 if they can drop up to five flat disks accurately into slots that range in value from $0 to $10,000.
It seems simple enough — until you consider the 54 pegs studding the board. Each peg it strikes along its journey alters the course of the disk, effectively randomizing the results.
Now think about distribution operations: As hundreds of orders traverse countless decisions, handoffs, and steps in order management systems, business owners are often left guessing how close they’ll get to their performance goals.
If you’re able to manage the variables, most of your orders will land in the perfect order “slot.”
Follow the bouncing disk
Once he’d gained visibility into his distribution operation, Pete realized he was playing a Plinko game of his own — a game that required him to send about 10,000 orders per month into the right slots. Factoring in every single line item, decision, touchpoint, and step for each order created potential points of failure that numbered in the millions. No wonder distribution is both exciting and nerve-racking!
Pete explained that he navigated the vast array of variables in his day-to-day by focusing on one key metric: the percentage of orders that successfully got out the door on time. That left a lot of unknowns about the quality of each order — which, of course, had an impact on his bottom line.
How can distributors quantify order quality? Let’s start by considering the concept of a “perfect order” as described in this IndustryWeek article:
Perfect order performance = (percentage of orders delivered complete X percentage of orders delivered on time X percentage of orders received damage-free X percentage of orders with correct documentation) X 100
That’s useful, but it’s not enough. Specifically, it frames a perfect order entirely from the end customer’s perspective. Satisfying customers is crucial — but a 360-degree view requires the seller’s and distributor’s perspective. After all, you could consistently deliver “perfect orders” according to IndustryWeek’s formula but still lose money. That’s not a satisfactory outcome!
To arrive at a deeper understanding of order quality, we need a measure of gross margin relative to the target (ideally at the line level). I suggest we consider percentage attainment of the gross margin target.
An example: If the target is 25% and the aggregated orders for the day on a weighted average basis sum to 22%, the “percentage attainment” is 22/25, or 88%.
Certain failures are especially costly, like shipping orders below a gross margin target or to a customer that was significantly overdue on accounts receivable. Others are smaller when taken individually — but compounding enough of these can result in death by a thousand cuts.
To make matters worse, most businesses can’t assess in real time the amount of loss or economic waste their operations are suffering. Even a rocket scientist can’t keep up with that level of complexity. Without technology, there’s no realistic way to capture it and ultimately prevent it altogether.
For Pete — and for thousands of other owners and decision-makers who’ve followed his lead — Cavallo software has changed the game. Once they’ve identified the variables and applied a tech solution to track them, these professionals can focus on the strategic choices that will maximize profit and ROI.
Quantifying the variables in your organization
The first step to mastering the Plinko game behind your distribution operation: Identify the “pegs” that are sending your orders in unexpected directions. Here are the most common obstacles Cavallo customers tell us about:
- A customer placed an order that’s over their credit limit
- The order total is below the expected margin (either in percentage or money)
- Items on an order are out of stock
- The order was placed as rush/priority
- A customer who has placed an order has an unpaid balance that is past due
- The order has a dropship item
- The order has an unusually high dollar value
- The order’s required ship date is far in the future.
- The order is missing tracking number information
- The order has a payment term that doesn’t match the term assigned to the customer
Did you find that you have all these variables under control? You’re well on your way to winning the game. (For the variables you might not know about, read my recent column about operational “black holes” to learn how to identify the variables you can’t see.)
For everyone else, here’s your opportunity to become the benchmark instead of chasing it.
Decision-makers have several technology options to consider. These include building their own custom software and finding commercial applications that deliver the configurability, highly flexible business rules, and automation to achieve complete command of their quote-to-cash operations.
At a minimum, your selection criteria should include consideration of:
- Fit to requirements (business and technical)
- Time to value
- Return on investment
- Long-term flexibility
Work with a trusted technology partner to assess your options. If you want guidance on choosing the right tech partner or would like to discuss your journey with one of our experts, we’re happy to help in any way that we can.
Good luck on your journey toward a fortune in fabulous profits!
Want to see more? Take a look at the other two blogs in this series: