What a refusal costs, and how to hold one

A position is a set of refusals, and refusals are not free

Everything so far has priced what a refusal earns. This lesson prices what it costs. A position that has only been costed on one side is not a decision. It is an enthusiasm, and enthusiasms do not survive August.

There are three real costs. Two are money. The third is the one that actually kills positions.

The first cost: your categories are bundled inside individual buyers

Kelverin's own sheet separates workwear from casual bottoms cleanly. No buyer's sheet does.

Pendrigg is a mid-market retailer that buys both. It placed four orders with Kelverin in the year.

The refusal takes USD 24,600 from Pendrigg. The question nobody can answer from a spreadsheet is whether it also takes the USD 96,900.

That is 2.67 times the entire upside of the refusal worked out in lesson 4. A portfolio decision carried out as a blanket policy can cost more than it earns. The reason is simple. The categories that sit apart on your sheet are bundled together inside individual buyers. So the refusal is carried out buyer by buyer, and the order you do it in is part of the decision. Refuse first where the buyer has nothing else with you. Refuse last where the bundle is largest.

The second cost: the quiet month, and why it is where positions die

Kelverin's worst month of the year had 178 line-days of work against 289 available. That is 111 line-days idle, or 38.4% of the month.

In the middle of it, a five-pocket enquiry arrived: 21,000 pieces across five colours, none of them above the threshold. Sixty-two line-days of work, USD 3,360 of contribution.

Against an idle line the order is worth taking. That is true every single time, and there is no arguing with it. That is precisely why positions die. No refusal is ever broken by someone deciding the position was wrong. It is broken by someone doing the correct short-run arithmetic, in a month when the correct short-run arithmetic points the other way.

So the exception has to be priced against something the short-run arithmetic cannot see. Kelverin's own records show what that is.

Of the 12 small five-pocket enquiries Kelverin received in the year, 9 came from buyers it had accepted a small order from before. The enquiry book is not weather. It is a consequence of the acceptance book, with about a season's lag.

On Kelverin's two-year record, one accepted small order produces 2.4 further small enquiries over the following two seasons. At its uncontested win rate of 75.0% that is 1.8 more small orders. Kelverin's average small five-pocket order runs 47 line-days:

1.8 orders x 47 line-days           =  84.6 line-days
occupied at USD 40.66 instead of 420.26
84.6 x USD 379.60                   =  USD 32,114
against the order's own contribution   USD 3,360

The USD 3,360 order carries USD 32,114 of later occupancy. That is 9.6 times what it brings. An exception is not a decision about one order. It is a purchase of two seasons of enquiries you have already decided you do not want.

Making the refusal expensive to break

A rule that depends on somebody feeling strong in August is not a rule. The way to hold a position is to make breaking it cost something. There are three places to put that cost, and none of them is a memo.

The costing system. A refused enquiry does not get a price. It gets a one-line answer with a name on it. If a refused enquiry can still be costed and quoted by anyone in the building, it will be, in the month it should not be.

The incentive. This is the largest one at Kelverin, and it was pointing the wrong way for years. The commercial team was paid on order value. Consider two orders:

30,000 five-pocket at USD 6.85  =  USD 205,500
12,000 coveralls   at USD 12.60 =  USD 151,200

The five-pocket order is 35.9% larger on the number the team was paid on, and it occupies the factory at 9.4% of the return. The incentive was doing exactly what it was designed to do. Pay on contribution per line-day and the same two orders swap places, without anybody being asked to be more disciplined.

The review. The categories are named in the annual plan, with the numbers from lesson 1 beside them, and the plan is read out at the review. A position that lives in one person's head is one resignation away from being over.

The third cost, which turned out to be a gain

The last cost is that a refusal has to be said out loud, and saying it costs relationships. Kelverin wrote to the six buyers who had sent it small five-pocket enquiries. Two seasons later:

One buyer left, and that is a real cost honestly recorded. But two buyers who had only ever sent Kelverin bottoms sent workwear, worth 94 line-days at USD 420.26. They did it because the letter told them what the factory was for, which nothing in four years of capability packs and factory visits had managed to do.

The refusal was worth more as a statement of position than as a refusal. That is not a happy accident. A list of things you do is unreadable, so a buyer skims it and remembers nothing. A short statement of what you have stopped doing sticks, and it sticks precisely because it costs the sender something. A buyer reads it as information, not as marketing.