The company was an intermediary between producers and recipients. As there was a considerable amount of handling involved to prepare the items received, a discount was offered to producers who would undertake some of the pre-processing themselves.
However, the company had a large number of problems with producers who did not perform the preparation agreed and contracted. This was for a number of reasons. Firstly, items being received were not consistently verified for contract compliance; secondly, and critically, when consignments were identified as falling out of specification , there was a lack of willingness to challenge larger customers and refuse discounts. Too often the sales executives were prepared to allow the discount in return for a non-specific promise to do better.
The company didn’t understand the scale of the problems. In many cases, they had become so consistent in the operational side that there were informal procedures to handle errors, with the costs not being recognised. It had got to the stage where only unexpected errors were being reported and so it was not seen to be a significant problem.
However, some executives had started to consider that the underlying problem was far greater than suspected. We were asked to review the situation.
By driving down into what actually happened, we created a map of problems and actions in the current state. Faulty consignments would appear in various points in the process-chain and would have to be corrected via a rectification procedure at much higher cost. So the company was negatively hit at a number of points:
the inflated costs of correction;
the direct revenue lost through not clawing-back discounts;
the opportunity cost of filling the process-pipeline with items that would have to be processed again and preventing correct items from being handled;
the follow-through of meeting contractual delivery performance.
Our initial analysis showed that the total of revenue forgone and costs incurred was upwards of £50 million pounds and may have been over £100 million. This manages to be simultaneously straight off both the bottom-line and the top-line! While some of this was due to internal errors, the majority was attributable to incorrect pre-processing by a few customers, frequently some of the biggest spenders.
The conclusion was that there was indeed a major variation from expectations and that even those identified were not being tackled.
We recommended:
revising verification procedures when receiving consignments to support disputes over discounts allowable;
monitoring errors that emerged in the process pipeline to identify consistent under-performers to focus validation resources on these producers;
logging common errors for root-cause analysis.
