Order Management - The Real Job of Business

Published in Operations & IT Articles category by MBA Skool Team , Published on May 30, 2011

Order is one thing which makes all businesses run. Order is the ultimate aim of any business. If you get orders, you are seen as successful. If you don’t, obviously you don’t earn. Order management is a very important aspect of any business. Orders help you earn revenue, build customer relationships. Successful fulfillment of Orders on time is the litmus test for any business.

There are two types of cycles in any business

1) Procure to Pay

2) Order to Cash

Order Management

First one deals with the costs a business incurs in getting raw materials, payments to suppliers etc. The second one deals with all the revenue you earn. So Order Management is really important. Order to Cash fuels the Procure to pay cycle.

So what is Order Management?

Orders can be received by a company in following ways.

1) Online

2) Telephone

3) Enquiry

4) Email etc

There are many other ways depending upon the operations of a company.

Is placing an order and processing it so straight forward?

The answer is No.

If you leave apart the counter (OTC) sales, the process is a bit complicated and not simple. 

Let us take an example of a manufacturing giant (MG) implementing a CRM system at his premise. Assuming  the total valuation of the project to be about 20 million dollars. There are about 5 companies in the market fighting for that order.

Now the real process begins. The manufacturing giant (MG) asks for quotes. A Quote is an offer from a company to its prospective customer. Our 5 companies will give a Quote to MG. Now after reviewing the quote and negotiating, one of those 5 companies will be given the Order. 

This was a basic B2B process. Now let’s complicate it a bit more. Let’s jump to the customers of MG. MG is also a company who has its own customers too. How does it get orders?

Basically the full process starts at Lead Management. A typical company keeps their leads and qualifies them from time to time. Now whenever a lead needs a product, he is contacted by a sales representative of MG. He is not alone. There will be many Sales Reps in queue (similar to our IT example in the start). Now the lead (prospective customer) asks for quote from our Rep. 

A Quote is an offer made to the customer. It has the details of the customer, the products, price offered and date of shipment (tentative).

The two most important things in any quote are

1) Price

2) Promised Date(ATP)

Let’s come to the concept of ATP. ATP (Available to Promise) is a very important concept in Operations Management. ATP tells you the quantity available with company at a particular time in point. The Sales Rep checks the ATP of the product offered in the quote before giving it to customer. ATP typically tells you the inventory on hand and also the status whether demand can be met or not and when it will be available next, considering the lead times.

The quote ATP doesn’t block the products in the inventory as customer may or may not buy the product. A quote is sent to the customer. If the customer rejects it, negotiations can begin. If the negotiations work out, it’s fine or else the process ends there.

Now if the customer accepts your offer the Order is created out of the quote itself. The order also has all the details as in the quote. But this time the ATP is done again to confirm the availability blocking  the products in the inventory. This means they are no longer available for the other customers as they are reserved now. Now the Order is created.

Another very important part of Order is the Shipment terms. It tells the details about the shipment of the product to the customer. It covers the mode of delivery, payment terms etc. Payment terms can be of different types.

1) Credit

2) Cash

3) Cash on delivery

4) FOB(Free On Board) etc

Note: for understanding all these terms in details you can download MBASkool's free guide on Ops .

The order can also be of different types like

1) From Stock -  Order is fulfilled from an item already in your inventory

2) Drop Ship - Order is fulfilled by the supplier of our company to our customer. E.g., A customer Z orders a product X from MG. MG places an order with its supplier Y for X . Y ships X directly to Z on behalf of MG.

3) Back To Back - Order is fulfilled by our company itself after procuring part from the supplier. E,g,  A customer Z orders a product X from MG. MG places an order with its supplier Y for X . Y delivers X to MG. Now MG delivers it back to Z. This is back to back order.

There are other types too but they are being covered in this article as these are the most commonly used and are enough to cover the concept.

After the order is created, Freight charges are calculated. After that the Invoice is printed and the order is fulfilled.

The order data is also captured by the planning team to plan future production or ordering. This data is also used by the forecasting team to understand the demand nature. The Finance department also takes data from order management to handle the accounts receivables and payables. 

This is the way how Orders are handled in business. There are lot of ERP and CRM packages available which can handle all the order management for entire organizations. Whatever the way, Order Management is one of the most important aspect of business.

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