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December 11, 2018

How Can You Reduce Your Transaction Costs?

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In the non-manufacturing world, a transaction is an easy process. When you buy a shirt, you give money to the store, and they give you a shirt. That’s a transaction.

In the manufacturing world, a transaction is a more involved process. A customer sends a purchase order that orders 1,000 shirts (normally, economists like to say “widget,” but we’re sticking with shirts). The manufacturer processes the order, sends back a purchase order acknowledgment. Then they start a work order to make the shirts. They order the raw materials, those materials get shipped in, and the manufacturing process begins. Then the product is shipped, complete with a packing list, and an invoice is sent off. Once the invoice is paid, the transaction is finally complete, and the customer has their shirts.

That multi-step process, with all the different forms and processes, is the transaction. And it can be a costly one, especially if there are errors at any time along the process.

For example, the purchase order could be entered wrong into the manufacturer’s system, and they accidentally make 1,000 red shirts instead of 1,000 blue ones. Or they make 2,000 shirts. Or they’re the wrong size. Any number of things can go wrong just in that first step which will have a ripple effect throughout the entire company.

There are other places where things can go wrong: the shippers could send the wrong number of shirts, the packing list could be off, or the shipping address could be wrong. The actual price of each shirt could be too high or too low, or they wanted a pocket on the front, but there aren’t any.

All of these problems add to your transaction costs, and there are a couple of ways you can eliminate them.

 

First, Just Do Everything Right the First Time

 

Doing it right the first time means that when an order comes in, it’s edited and audited for accuracy. In other words, make sure nothing on the order is funky or unusual. If there was a quote that preceded the order, make sure those two documents match up. Make sure the part numbers are identical on the PO and the quote. Make sure the prices match, the special instructions are followed, and so on.

The biggest worry, in addition to all those lost shirts that will have to be returned, is that the payment gets disputed. Not only will you not be paid for the original screwup, but you have to remake all those shirts for the same cost, which eats into your profit. And if you make enough mistakes, you’ll start eating into your operating capital just to be able to purchase the raw materials as well as pay your employees.

Measure your errors in your transactions, and narrow them down to spot the person who’s been making them. If it’s a departmental issue, provide any training that might be needed. If it’s a single person who keeps repeating the same mistakes, suggest they might be happier somewhere else. But you can’t keep them in that position if you’re going to see your company succeed.

 

Second, Automate Your Process and Make it Paperless

 

There are numerous benefits for going paperless, including no need for storage or those related costs. Electronic data storage also means information is easier to retrieve, so you can track down problems more easily.

Additionally, there are ERP and EDI (electronic data interchange) systems that automate the whole ordering process for you. When a customer enters their order, they’re responsible for entering the right purchase order information. Once the PO has been entered into the system, the PO acknowledgment, work order and materials list, and even the packing list are all generated from that original PO which came from the customer.

Not only does this help you avoid any errors, but if there are any serious errors, such as a wrong part number or quantity, that will often come from what the customer has generated, and not from a filing or data entry error by one of your associates.

And if you and your customer are both using the same EDI system, you can easily transfer information back and forth, processing many orders in minutes, not hours. Problems are found quickly, if not eliminated outright, and you can avoid those costly errors. Plus, it cuts down on delays in getting paid, because your staff isn’t spending several days fixing an error and remanufacturing the corrected version.

Going paperless and automating your process can greatly help you reduce your errors, which in turn reduces your transaction costs. I was able to reduce our error rate by 40 percent, which increased our profitability, all by implementing a measurement process for the entire company.

Comments? You can contact me directly via my AdvisoryCloud profile.

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