Customers today are constantly inundated with information across many different channels. Thanks to constant connection through mobile technology, they can find product information anytime, anywhere.
As a result, their expectations for the purchasing process have changed dramatically. Customers want the best product (at the best price), when they want it, and how they want it (buy in-store, purchase online, etc.). It doesn’t take long for customers to switch to a different vendor if they don’t get what they want. While there are a few companies like Apple — where the products are uniquely differentiated and customers are willing to not only pay a premium price, but also wait for availability — this is not the case for most companies.
More often, companies attempt to win customers by going the extra mile to meet their expectations (such as paying premium freight charges to expedite products, etc.). How does an enterprise delight its customers and stay profitable at the same time?
Let’s consider a typical order promising and fulfillment process in a business-to-business (B2B) enterprise. B2B companies can receive orders online, through sales representatives, EDI transactions and more. Every order is for a specific product and quantity. Some orders have a requested delivery/ship date while many don’t. Upon receipt of the order, the company must decide how to best fulfill it. For instance:
- Does it need to be fulfilled from available inventory?
- Does it need to be fulfilled from in-transits/scheduled receipts?
- Even though there is available inventory, does the fulfillment date need to be pushed out so it doesn’t jeopardize the fulfillment of future orders from higher priority customers?
- Does it make sense to fulfill the order from a secondary fulfillment location, which will result in an additional freight charge?
- If the customer order requires manufacturing and there is a shortage of parts, does it make sense to expedite parts (and incur additional charges) to fulfill the order on time?
In our experience, most companies don’t have a structured and systemic framework to answer these questions. In the absence of this, they often resort to a first-come-first-served (FCFS) fulfillment policy, which is a sub-optimal way of handling the order processing and fulfillment process.
What are some of the problems with the FCFS model? First, you may be allocating available supply to lower priority customers, leaving you without enough supply to fulfill future orders from high-priority customers. Second, you may be fulfilling an order with a future due date using current inventory. By doing so, you risk not having enough inventory to fulfill future orders that come in later with the same-day ship request.
Given these factors, what is an optimal order fulfillment strategy to deploy in your organization? Since we are not living in a world of infinite supply, this is an important question for every enterprise to consider, as the ramifications can be significant. Whenever an enterprise doesn’t fulfill a customer order on time, its service levels are negatively impacted, revenue lost and customer loyalty is potentially eroded.
On the other hand, if the company goes above and beyond to fulfill orders (incurring expedite charges in the process), its profitability is negatively impacted. When devising a structured and systematic order fulfillment strategy, a company must evaluate these trade-offs to determine the best way to fulfill orders.
Amitabh Kumar is Industry Strategies Director, Manufacturing, JDA Software.