In this example, acquisition is strong 1991 through 1994, but in 1995 & 1996 it begins to decrease.  This is very normal for niche markets, because there is a limited universe.  The problem lies in the attrition. Every customer file will have some natural attrition.  Lifestyle changes can eliminate the needs for specific products or a company’s ability to market to those individuals.  Normally, this will account for 3 - 5% of the attrition. 

This company’s problem is that attrition has been trending upwards from 1992 until 1995 when attrition exceeds acquisition.  They are in serious trouble even though their financial report may indicate that they are thriving.  By the time the financial statement is impacted, it may be too late to save the business.

Conducting a Physical

Once the pulse is checked, a complete fulfillment audit of service, productivity and costs must be conducted to determine if any insidious diseases are threatening the health of the company.  Even if the pulse indicates a healthy, thriving organization an audit may identify unforeseen threats to retention and profitability.

If a company has been audited before, then they will have a baseline for comparison.  If not, then the initial audit will provide a baseline for future audits.  Historical data for the customer file analysis is readily available, because marketing utilizes that information to determine circulation plans and projections.  Data for the fulfillment audit is often obscure, so an initial audit will be time consuming and tedious.  If a complete audit seems overwhelming, begin with the basics (i.e. timely delivery; accurate processing) and expand the magnitude with each new audit. 

Beyond the basics, the best service meets or exceeds the customers’ expectations.  Customizing service to correspond with specific customer expectations will increase retention and profitability.  Too often companies define their customer service by other companies’ standards and fail to provide the service needed by their customers.  For example, same day shipping is critical for the customers of some business to business catalogs but not for most business to consumer books.  If the cost of providing a service exceeds the return of customer loyalty, then providing that service is detrimental to the long term success of the company.

The first stage of a complete audit is to project the company’s growth for three years in dollars and units.  Growth will have a definite impact on service levels, staff and costs.  Planning for the impact will minimize the strain on resources and morale.  Estimate the volume of order/customer service calls and mail; warehouse receipts and shipments; and returns. Identify specific order characteristics such as lines and pieces per order; single versus multiple line orders; and stock versus dropship orders.  Order characteristics will be used to determine the most efficient methods for processing orders. Volume will be utilized to anticipate staffing, space and budget requirements to maintain or improve service levels.

Service levels include call management, turnarounds, accuracy, inventory ratios and any specialized functions unique to the company.  After itemizing the categories and analyzing the data to determine current service levels, define realistic goals to be accomplished by the next audit.  Some of the categories, such as call management, need to be monitored daily; others may be weekly, monthly, and/or quarterly.  Once the service levels are defined and analyzed, the results may be weighted to establish an overall service index.

The next stage in the audit is productivity.  This includes TSR availability, mail order entry, average length of calls, and comparable warehouse statistics.  Initially the productivity information will be utilized to determine costs and staffing, but ultimately, it may become the foundation for a standard and bonus program.  The format for the productivity audit is the same as the service level:  Analyze the data to determine the current statistics, then define realistic goals to be accomplished by the next audit.

The final stage in the audit is defining the cost of fulfillment.  This area includes: Direct and indirect labor; benefits; space and equipment; information and telecommunication systems; and any other expense associated with operating a fulfillment center.  Each expense category should be divided into applicable sub-categories.  For example:  Customer service direct labor may have inquiries, complaints, outbound calls, returns, and cancellations as sub-categories.  Each category or sub-category should be presented as a total cost and a cost per order.  The cost per order will be the benchmark for measuring fulfillment costs as the company grows.  It is critical that the sum of the categories match the expenses on the financial statement.  Often, fulfillment costs are under or over stated.  Tying them back to the financial statement will identify any discrepancies.

Developing A Plan

After the pulse is checked and the physical completed, a plan for improving service and profitability must be developed.  Notice that the financial objective is to increase profitability, not reduce costs.  Increased profitability and cost reduction are usually synonymous in the short term, but contradictory in the long term.  For example, reducing call center staff may immediately increase profitability, but the reduced service may ultimately increase customer attrition.  The goal is to balance service and risk to maximize service and profitability. 

During the physical audit, specific goals were established to improve service.  Now, the objective is to outline the process for accomplishing the goals and calculate the corresponding costs and expected return on investment.  For example, if the current service level is eighty percent of the calls answered in twenty seconds and the goal is ninety percent, then the staffing and resources of the call center must be reviewed.  Low call center service levels are usually attributable to inefficient scheduling and under staffing.  Review the service daily peaks and valleys to determine whether scheduling or staffing is the most critical issue.  If the range is fifty to one hundred percent, then adjusting the scheduling will improve service without increasing costs.  If the range is seventy-five to eighty-five percent, then the call center is understaffed.  Often, the staffing can not be increased without increasing space and equipment resources.  This can be very costly and the return on investment must be evaluated to justify the expense.  Sometimes a goal that initially appeared reasonable must be altered to become practical for a growing company. 

The process of outlining and evaluating goals must be completed for each item included in the audit.  When the final goal is determined, then it is critical to document the plan for achieving that goal.  The documentation would include an outline of the plan, cost projections, any revised procedures and a schedule for implementation.   

Probably the largest problem in implementing new procedures or systems is employee resistance.  Hundreds of staff hours and thousands of dollars can be invested in the development of an improvement plan that is never fully implemented because of employee objections.  The best method for avoiding this pitfall is to create a team of the employees involved to work with management to develop the plan.  This not only creates employee ownership, it improves the accuracy of the initial evaluation.  Invariably, procedures evolve from their original format over time.  Once this evolution has occurred, the best source for current procedures is the staff implementing them.  If these employees are not involved in the process, the very foundation of the plan can be erroneous.  The trick is to balance the level of ownership so that the changes are implemented, but not cast in stone.  Do not create so much ownership that future change will be resisted.

The final step in developing and implementing the plan is to schedule future audits.  The best schedule will have individual areas reviewing their progress on a daily or weekly basis and an overall audit on a quarter, semi-annual, or annual basis.  The timing of the overall audit will depend on the growth and goals of the company.  If the company is high growth with aggressive goals, the numbers should be reviewed quarterly.  If the company is established with steady growth and goals, the numbers should be reviewed annually.  Find the timing that is best for the individual company.

Evaluating the health of a company is challenging, time consuming, and requires commitment throughout the organization.  The process is as important as the results because it requires a review of procedures and personnel to identify issues.  The internal focus on the company can improve morale and management/staff relations if teamwork is emphasized.

Next Steps:

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