Over time, we have developed a methodology that allows us to monitor the significance and impact of purchasing, material control, and the entire order–delivery chain on the business, with the goal of improving overall business profitability.
It is therefore essential to define how that impact is measured and what key figures are used when assessing the importance of the efficiency of work performed in the order–delivery chains to the entire business. For this purpose, the key figure of real productivity of labor can be selected. This figure compares wage costs with the added value generated by the company. This comparison is important because a surprisingly large portion of a company’s labor costs arises from order–delivery chains, and it is crucial to be aware of these costs when seeking to improve overall productivity. In the long run, economic growth and increased welfare are based on improvements in labor productivity.
The operating profit or loss shown in the income statement is the sum of hundreds, thousands, or even tens of thousands of business transactions, and the profitability of individual transactions varies enormously. Unfortunately, alongside profitable deals, there are always many less profitable or even entirely unprofitable deals. In B2B business, some customers are “good,” and business with them is profitable. At the same time, some customers are “bad,” bringing only losses. Similarly, only a portion of a company’s products or services is profitable, while a far too large portion is more or less unprofitable. These facts are not always recognized within companies.
Profitability is generally measured by revenue or gross margin, but this almost always leads to entirely wrong conclusions. The reason for this is the uneven distribution of a company’s overhead costs. Only when overhead costs, which mostly result from actions in the order–delivery chain, are correctly allocated can a realistic understanding of profitability be gained. From experience, we know that the result is often a complete surprise to company management and a source of general astonishment.
Cost allocation must occur at the transaction level. This is strongly tied to productivity in that once both strong and weak products, services, and customers have been correctly identified, development work can begin. This does not always mean eliminating poor products. Removal is often neither sensible nor feasible, but when good products, services, or customers can be made even better, and weaker ones can be improved, the overall result can be entirely different.
Productivity improves by making better decisions every day, in each individual business transaction. For this to succeed, the costs and opportunities within the order–delivery chain must be known and understood at all levels of the organization—not just in purchasing or material operations, but also in sales, marketing, and at the executive level.
(Original text: Jouni Sakki. Edited by: Blomqvist / Koikkalainen)