When it comes to customer and product profitability, the numbers often reveal a surprising truth: many businesses are losing money on some orders without even knowing it.
Poor visibility in this area can drain profits through the supply chain and logistics operations.
Watch the video below to learn how to address these hidden challenges.
Why Don’t Businesses Address Profit Leaks in Their Supply Chain?
For the past 30 years, I’ve worked with businesses to help them improve their logistics and supply chain operations. One area that continues to surprise me is how many businesses fail to recognize the cost leaks they have due to poor visibility of customer and product profitability. From my experience, I’d estimate that 10-30% of customer orders in most organizations are actually loss-making. However, many companies are completely unaware of this because their reporting systems don’t give them the insights they need.
But instead of focusing on detailed cost analysis, I want to address a more fundamental question: Why don’t businesses fix this issue? If you knew 18% of your customer orders were losing money, why wouldn’t you take action? The reality is, many businesses just don’t.
The Hidden Challenges of Fixing Profitability Issues
The main reason businesses often overlook these issues is that fixing them feels too complicated. Addressing loss-making products and customers requires a cross-functional approach, which means it’s not just about improving one area of the business. It’s a holistic problem that spans procurement, inventory management, customer service, and forecasting.
Take low-margin products, for example. Companies often resist eliminating unprofitable products because they’re concerned about disrupting their product range or losing sales. A typical argument might be, “If we remove this product or color, will it hurt sales of the others?” Similarly, businesses struggle with low-margin customers who place frequent, small orders. Tightening customer service policies to address this can be uncomfortable, as it may require limiting how often or how much these customers can order.
There are also the impacts on inventory decisions, sourcing, and forecasting. For example, businesses might be hesitant to adjust inventory placements or revise their supplier reliability because these changes can affect the overall distribution network. These are all challenges that many businesses would rather avoid.
The Role of Leadership in Fixing Profit Leaks
Another reason why businesses don’t fix profit leaks is the lack of top-level leadership driving change. These issues are cross-functional, and solving them requires involvement from various departments. However, if leadership isn’t fully engaged—often from the CEO or Managing Director—these problems are easily pushed aside. Without coordination from the top, departments become siloed, each focusing on their own area without considering the broader impact on profitability.
Why Addressing These Problems Is Worth It?
Some businesses, however, are willing to tackle these challenges head-on. Recently, I’ve worked with clients who are redesigning their distribution networks, adjusting inventory placement, and improving supplier reliability to address the root causes of loss-making orders. These efforts can lead to a 10-15% reduction in logistics costs, which shows that the results are worth the effort.
Fixing profit leaks may seem complicated, but it’s clear that those businesses that take the time to address them will see significant benefits. It’s about improving visibility, breaking down silos, and getting the right people in the organization to work together to make the necessary changes.
Related articles on this topic have appeared throughout our website, check them out:
- Ten Ideas for Freight Cost Reduction in Your Supply Chain
- How to Improve Warehouse Layout Efficiency and Save Costs
- Cost to Serve – A Smarter Way to Improved Supply Chain Profitability
- Energy and Labour Costs: 2 Top Warehousing Challenges in 2023
- 4 Common Supply Chain Cost Blowouts
