How to STOP Order Profitability Leaks – Logistics Costs

Why Aren’t Businesses Fixing Profit Leaks in Their Supply Chain?

One of the topics I focus on often is customer and product profitability. Over the years, I’ve seen how poor visibility in these areas can lead to significant cost leaks in logistics and supply chain operations. From my experience in consulting for the past 30 years, I can confidently say that 10-30% of customer orders in many businesses are actually loss-making. The surprising part is that most organizations are unaware of this because their reporting systems simply don’t provide the level of visibility needed to spot these leaks.

But today, I’m not diving into specific cost analysis. Instead, I want to address an important question: Why don’t businesses fix these issues when they’re so obvious? If I told you that 18% of your customer orders were losing money, why wouldn’t you address it? The truth is, many businesses don’t take action, and I think the reasons are worth exploring.

Why Do Companies Overlook Profitability Issues?

The main reason this problem persists is that it often gets put in the “too hard” basket. Fixing loss-making products or customers requires input from multiple departments, and that’s where things start to break down. Addressing these issues needs to come from the top—usually from the CEO or Managing Director—because the solutions cross several functions, from procurement to customer service to inventory management.

Let’s take low-margin products as an example. When the topic of cutting unprofitable items comes up, it usually sparks debates about maintaining a full range of products. There’s often a concern like, “If we remove this color, will it hurt sales of the others?” Similarly, there are challenges with low-margin customers who place frequent, small orders. Tightening policies around these customers can be uncomfortable because it affects customer service.

The problem also extends to inventory, sourcing, and forecasting decisions. Many businesses hesitate to make changes in these areas because they can impact the broader distribution network. These decisions can affect everything from product availability to supplier reliability, which often leads to hesitation and inaction.

What Needs to Happen for Change?

Some businesses are taking the necessary steps to address these profit leaks. Recently, I’ve worked with clients who are redesigning their distribution networks, adjusting inventory placement, and improving forecasting accuracy. These actions have led to reductions in logistics costs by 10-15%, proving that the effort to fix profit leaks is worth it.

It’s clear that addressing these issues requires leadership, collaboration, and a willingness to make tough decisions. But the businesses that do take action are seeing real, measurable benefits.