SCM Fundamentals: Customer Orders: Part 1

SCM Fundamentals: Customer Orders: Part 1

Now that we have talked in depth about forecasting what the customer will order we finally get to talk about what the customer will actually order.

So what are the different types of customer demand 

Sample Requests: This may be the first order for an item you will get from a customer. Often your sales team will have been working with the customer and offered them samples free of charge. There may be a sample process that is separate to the order process but in a lot of cases sample orders will come through the normal ordering process. It largely depends on the business and the nature of the product.  Regardless Sample demand is as valid and as important as regular demand.

Standard Order: This is an order that comes in from a customer with details of the item or items being ordered plus a delivery date in the future and a quantity that probably meets requirements for minimum order quantity and order multiples. It will also have details of the price the customer expects to pay for each item. There will be details of the Bill to address (i.e., who to send the bill to) and the Ship to Address (where to ship the products).  These will often be different even if a subcontractor is not involved. 

Cash Sales: The customer comes in, picks the product they want, pays for it and leaves with it. You may think this is the most common type of customer order because this happens in shops.  And it may well be the most common type of order in the supply chain. However, from a production factory point of view this is relatively unusual.  Normally this demand is collated into single orders by stores or distribution centres and sent up the line to replenish stock.

Rush Order: This is when customer demand is met in a shorter time than the normal lead time. It will involve pushing this order ahead of other customer’s orders. There may also have to be overtime or expedited shipments from your suppliers. As a result, a rush order is often for a higher price.

Proforma Order.  This is like a standard order with one key exception. The customer must pay in advance of shipment. It is often used for new customers or customers with a bad credit history.  This is designed to protect you as a business.  Big customers can go bust leaving you with outstanding invoices that you will not get paid for and this process is designed to protect you as few companies go bust with no warning signs at all.  But it can be a bit extreme.  If a good customer misses a couple of payments the system may default to giving them proforma status which you have to watch for especially with key customers.  I remember getting one phone call from a key customer asking where their product was. I was confused because I remembered we had produced that item some days previously. It turned out the stock was still in our warehouse as they had missed a payment between production finishing and shipment happening and the order went on hold.  That is an awkward discussion to have with a key customer but fortunately I had a good relationship with them.  It is why really you should put in a process to review not only planned production for a particular day but also planned shipments.  

Contract: This is an agreement in advance to deliver a certain quantity to a customer.  The contract order may cover a set number of deliveries and a total quantity, but the timings and quantities will not be finalised until closer to the event.  This might happen when a contract is awarded to supply say windows to a major construction project, but the exact details won’t be finalised until construction reaches the required stage (in some countries that may be predictable but anyone who has ever built a house in Ireland will tell you the weather makes things unpredictable).  As the order gets consumed the contract is reduced until the total remaining reaches zero.

Scheduling agreement: Where a set amount is delivered at regular intervals. This is similar to contract but usually the quantities and intervals are consistent and ongoing. For example, you may have an agreement with your gas supplier to deliver a tanker every week on a Tuesday. To be honest Contract order and Scheduling Agreement are often used interchangeably but I have seen systems where they were both used.

Call-Off order:  This is often when there is a contract or agreement in place for a supplier to hold a certain amount of stock and the customer will only “call it off” as needed. This is common in the packaging industry.  Again, it is similar to a contract but you will see it classified separately.

Third Party Order: The order comes in from one company but for delivery to another. This is often the case with supply chains where production is outsourced.  For example, a phone manufacturer may design a component with a semiconductor company but then require them to deliver it to a subcontract manufacturer.  

Free of Charge Order. This could be seen as similar to Samples or as a standard order raised with zero price. Often it is used to replace items damaged in transit or which were found to be defective.  You could use one of the other order types but financially it isn’t the best practice and that is why many systems have this as a separate order type.  Interestingly free of charge orders are ones that may require special focus and attention through the production and shipment stages as you may be doing this because someone messed up a previous order.

Quotes: These aren’t really orders in that you won’t ship a quote. From a planning perspective these are more market intelligence of what MIGHT be coming down the line but is not a firm order yet.  However I have included them here because many ERP systems include the quotes in their order system.  This is important to know as you will have to be aware to exclude them if you are doing extracts from your system.

Returns. In a way these are the opposite to orders in that the customer is sending them back. However, these are similar to quotes in that many ERP systems handle them through the order system just as a negative quantity.  So, I’m calling them out here as, again, you don’t want to include these in any extracts you are doing for demand.

In the next post we will look at what information will be on the actual order that you get from the customer