As the years have gone by, it’s no longer good enough to have 60% on-time delivery with relatively long lead-times… customers’ expectations of response and supply are becoming more and more demanding. Customers want your products sooner and sooner; they want it on-time. This puts real pressure on production environments. There are times where you will have backlogs and arrears to catch up on. To solve this, you would want to find more capacity to deliver both the current order book and anything that is overdue. To achieve this without incurring extra cost to your business, get in touch. But when you do have a queue and the extra capacity is not immediately available – you have some decisions to make.
If you have several overdue orders, how do you prioritise? This comes down to what you measure and what you consider to be important. The CEO, Head of Sales, or anyone concerned by finance would probably encourage a discussion centred around the value of that order and how much it would be worth to the company. This leads to conversations around monthly sales and profit targets, the orders of highest financial value would be the best orders to deliver. However, Customer Service, Operations and some of the Sales department will be more interested in keeping customers happy – or less upset. So, priority should be given to the most overdue orders. They would argue to reduce the backlog in terms of days late, not in terms of pounds.
When your oldest order is also your order with the largest value, your decision is easy; you would focus on that one. When that is not the case, Operations faces a real dilemma: how to prioritise now whilst also working to create more capacity in the future to be able to do both. So, how do we judge?
The financial value should absolutely play a part in your decision-making process. An order that is worth £1,000 is not the same as one that is worth £50,000. Any business would be wise to understand the value of each order. However, whilst one day late may be absorbed by a customer without any real negative ramifications, one hundred days late will definitely cause the customer some problems and will affect your future working relationship – and your order book! This is pointing us in an interesting direction. Orders of large value should be prioritised AND orders which are increasing in lateness (and jeopardising customer relationships) should be prioritised.
So, you need to consider both parameters when deciding how best to prioritise the backlog. We can produce a useful metric: the value of the order (£) multiplied by the days late (d). The value itself has no real meaning, however, assigning that value to any of the overdue orders will give you a relative metric which will allow you to judge where to focus your attention and capacity to reduce the lateness and deliver the maximum value to the business. In this case, an order worth £5,000 that is two days late, would be ‘equal’ to an order worth £1,000 which is 10 days late. This appears to be a really good metric to drive the right behaviour. You would be considering both the sales value of the orders and the days they are late, and you would be prioritising the backlog accordingly to minimise the damage and maximise the value.
But we should also explore whether sales value is the right metric to use to determine the ‘value’. Two orders with a selling price of £10,000 each don’t always contribute the same amount of contribution (margin) to the company. For example, a product with expensive raw materials or significant sub-contract operations would have a high component cost relative to its selling price – resulting in lower margin. Products that are simpler to make and have low material costs and no sub-contract operations often contain more margin. So, a company could have two products which both sell for £10,000, but one of them might have £5,000 worth of costs and therefore only £5,000 of margin, and the other might have £3,000 worth of costs and therefore £7,000 of margin. We should not focus on the sales value but rather the margin, or as we would refer to it, the Throughput of the jobs.
This improved metric multiplies the Throughput value of the orders by the number of days late. This would indicate the real damage of the lateness and the real value of the order to the company; everything you need to know to prioritise within a backlog of orders.
Obviously, the aim of every business is to get the number of days late on all those orders down to zero. However, the reality is that many businesses have a backlog they just can’t seem to shift. If that sounds familiar, now you know how best to prioritise overdue orders – if you would like any further advice, don’t hesitate to contact us.
By Phil Snelgrove, Lauren Wiles