The concept of profit centers is often misunderstood as a merely administrative tool to justify the benefit of each department to an organization. Staff functions are usually exempt which is a flaw of this method, but let’s ignore that here. The biggest mistake made is to treat all departments as if they were each separate and isolated parts of the business.
This is how reality works: sales and marketing receive incentives to grow the business. They are the hunters bringing home the orders the business is all about. It is the nature of hunters to take calculated (or not so calculated) risks in order to kill their prey. These risks, in business often manifested in special prices or shorter than standard lead times, typically have consequences on the entire organization. Consequences that everybody but the hunters pay for.
The precious metals industry is an excellent example as it magnifies the impact. Shorter lead times than promised by production will not only cause extra cost (overtime) but also force the organization to hold higher inventories of precious metals (as raw materials or semi-manufactured products). I remember a business I worked for many years ago where a “hot line” process was introduced to fulfill particularly urgent customer requests. After a short period of time, 80% of all orders fell in that category rendering the system obsolete, and causing chaos everywhere.
The demand for lower than promised fabrication prices (the two usually come together) causes inter-dependencies between new products and spent materials coming back for recycling, which may – after some treatment – serve as input materials. Such materials have to be kept on stock to save labor cost, and to have the right alloy or pre-fab available when a customer calls. All of this piles up inventory cost for which production is held responsible.
Despite being a marketeer I have to admit that this is unfair. The hunters take all credit for bringing home the prey, they are the stars of the organization, and they get high bonuses for achieving (or over-achieving) their budgets. Production takes the beating for not being fast enough, for being too expensive, or for being inflexible. Here is how it should be done:
1. Sales needs to establish solid planning. Solid and realistic. No hockey stick effects in years 3-5 of the budget. No pressure (this may sound counter-intuitive) on growing the business year by year. The only result of this is that sales will over-promise. Allow sales to make realistic promises based on existing product portfolio and pricing / competition. New products and the economy are a marketing job, not sales. I once worked in an organization that penalized (!) sales people for over-delivering too much on their budget.
2. Based on the sales forecast, production needs to promise volumes, and cost. This will include all inventories required for the NORMAL operation of business, for which the department will be held responsible.
3. Both sides will then be held responsible for their promises. If for any reason sales needs an extra effort from production then it must be clear that sales will pay for it. This includes any effort to achieve shorter lead times, and all price reductions. If this sounds too rigid, how about separate budgets for marketing or management to decide they’ll do a business anyway, for strategic reasons?
Consequently, sales will be more conscious of the effects of its actions on the bottom line of the business. Sales will also be encouraged to think about compensation for the extra effort. If a customer wants an early shipment then there is no reason why should not pay a surcharge. Most will understand, and I know of companies applying surcharges they agree on with their customers at the beginning of a contractual relationship, so the extra price is a known factor and not a surprise.
Try it – it works wonders, it will add to your bottom line, it will prevent customers from playing the system (the purchasing organizations of large corporations in particular have a tendency to push the boundaries of agreed terms and conditions), and it will feel everyone within your company equally appreciated for delivering what they promised.
