Order Processing Accuracy in Distribution – The REAL Cost and True Bottom-Line Impact!

In today’s competitive landscape, improving profits often hinges on refining order processing accuracy, and reducing the cost of order errors is key to warehouse profitability. Gaining even the slightest edge can dramatically influence the bottom line. However, some items have much greater effects on the bottom line than realized. Order accuracy, although always talked about, is rarely understood at the financial level.

The Magic 99% Accuracy Claim—Why Is This Not Good Enough (Even IF It’s True)? Before we delve into these metrics further, let’s clarify definitions of accuracy in order processing. There are two we discuss, and although people use them interchangeably at times, they are quite different measurements.

Order Processing Accuracy: Line Accuracy Is Vital

The first is line accuracy. This is what most operations people focus on and what the “accuracy” metric is based on in many operations. It essentially means that accuracy is measured at the line level. If there are 10 different SKUs in an order, and one of those SKUs has any type of error (count, wrong item, damage, expired/short dated, etc.), that line is discounted. If there are 10 lines on an order and one is not in compliance, that is 90% accurate.

If we expand this to 1000 orders that have a total of 10,000 lines (for easy math), and there were 100 lines that were not in compliance, that would be a line accuracy percentage of 99%. This article deals with this metric, and all of the costs/measurements herein are using the line-level metric because of the financial impacts & associations. However, …

Critical Order Level Metric

There is another metric that should be used and actually is more important from an overall operational performance, and that’s the order level metric. Many companies overlook this, and the number can be alarming. This simply states that if any line/item on the order is not in compliance (same reasons as above), it means the entire order is discounted and is considered not in compliance. This is the true performance of the operation. Your customers don’t say they got 9 lines out of 10 correct—no, they have to pick up the phone or write an email and try to get the ORDER corrected. This is the way your customers view your operation.

That example order was 90% correct because there were 9 lines processed correctly out of—in this scenario, the entire order is non-compliant. In the 1000-order example, if we assume that the 100 error lines were one per order, this drops from 99% accuracy (at the line level) down to 90% accuracy to the customer (at the order level). This is a different conversation for a different day, but it is important that the context of the article is defined and that this core order metric is not lost in the conversation of line accuracy.

Many companies I have engaged with claim 99% accuracy, often based on educated guesses or incomplete metrics. However, even if a company is operating at a 99% average line accuracy, have they truly evaluated the implications of that percentage from a financial perspective?

It’s essential to dig deeper into these metrics, as relying on percentage measurements can often be misleading and may significantly underrepresent the reality of operational inefficiencies and, more importantly, the impacts on customer service levels and overall company and warehouse profitability. How important is it to obtain order processing to achieve warehouse profitability? To illustrate this, let’s take a closer look at a real-world example.

Warehouse Profitability—Actual Company Metrics:

• Order Volume:  3,750,000 Lines Per Year (3000 Orders per day * 5 Lines per order, on average)

Order Processing Accuracy: 99% to the Customer (reported)

The executives at this company felt satisfied with their overall accuracy performance, even amidst some customer complaints. However, the numbers tell a different tale, as calculating the actual impact of a 1% error rate reveals some staggering figures:

Total Line Errors Per Year: 3,750,000 * 1% = 37,500 errors/year at the order LINE level (99% accuracy). If we look at the order-level calculation, assuming 1 error per order for each of the 37,500 error lines, it drops the true order accuracy to the customer to 95.33%, as any line error on an order discounts the entire order. This metric alone is a staggering number in terms of the sheer number of errors made. However, what if we now apply an actual cost to these errors…

According to industry estimates, the hard costs for a single error can range from $40 to $300 per incident to resolve it, depending on product, shipping/delivery methodology, etc. Let’s use a conservative figure of $50 per error correction to measure the fiscal impact:

• Cost to Fix a 1% Error Rate:  37,500 * $50 = $1,875,000

That is cost in PURE PROFIT. For context, this company generates $500 million in sales with a true net profit margin of roughly 3%. In terms of actual profit impact, what impact does this $1.875M have on the bottom-line profit equation?

• At roughly $500,000,000 in gross sales, at 3% NET profit, which would equate to $15,000,000 of true NET profit. Now, let’s explore the significance of that $1,875,000 error cost in terms of corporate profitability:

Order Processing Warehouse Profitability

• $1,875,000 is equivalent to 12.5% of the $15,000,000 net profit!

To put this in perspective, to recoup that amount of lost warehouse profit, the company would need to generate extra sales to offset that loss, meaning more inventory, more carrying costs, more shipping costs, more labor, etc. How many more sales at a 3% net margin would this company need to make to offset the loss of $1.875M in errors?

• $62,500,000!

Warehouse Profitability. A Crucial Question Arises:

What marketing or sales program can rapidly generate $62 million in sales without incurring additional overhead in a company generating $500M in sales? Yet, we see companies investing heavily into marketing and sales without realizing that just processing orders accurately and efficiently will increase the bottom line—not at the lower 3% net profit rate, but dollar for dollar. However, they do not invest in their operations nearly to the same degree.

This invariably leads to the question of the actual cost of order errors, whether $50+ is really an accurate number, and what items go into that error cost calculation? Here’s a brief list:

• Time spent handling complaints and documenting issues
• Issuing call tags and/or scheduling freight pickups or using fleet trucks
• Costs of return freight
• Processing of incorrect items, including prep, possibly repacking, re-labeling product put-away OR disposal (writing off inventory)
• Placing orders for the correct replacement items
• Picking, packaging, shipping, and manifesting the correct items
• Shipping costs (which may be expedited)
• Cycle counts and inventory validation to validate the wrong product was a picking error
• Additionally, if company policy allows clients to keep incorrect items, which is now a loss of inventory, these costs can escalate quickly.

As one can see, the sheer cost of order errors is not only a customer service issue but also an erosion of true bottom-line profit. This doesn’t even consider the soft costs of customer dissatisfaction and churn, sales lost time, helping correct and smooth over issues with customers, inventory accuracy impacts, etc.….

While 99% accuracy seems impressive at first glance, the true cost of errors can be profound and needs to be defined. A comprehensive view of order processing accuracy is essential for realizing actual profits and achieving operational excellence. Don’t just settle for good enough; invest in your operation and strive for perfection in your order processing to achieve a sustainable competitive advantage and to boost the corporate bottom line.