Seven good orders and one bad book

The factory and the season

Zerrand Apparel makes outerwear in Tolquin: padded jackets, quilted gilets, insulated shells, softshell workwear. Nine sewing lines, about 1,400 people. It has built an export business over eleven years by being good at autumn.

This is Zerrand's autumn book. An order book is simply every order a factory has taken and not yet shipped. Zerrand's holds seven orders, confirmed between March and April, shipping between week 32 and week 41.

All figures are US dollars. FOB is the price of the goods loaded on board the ship at the export port; the freight and insurance from there are the buyer's to pay. The margin column is the costed margin: the profit the cost sheet says the order will make.

The book carries 11.66% margin. That is a point better than Zerrand's five-year average. In May the commercial director presented it to the board as the best autumn the factory had ever booked.

Every one of these orders passed the factory's own tests

Zerrand does not accept orders casually. It has three written rules, and all seven orders passed all three.

1. Margin floor. No order below 7.0% costed margin without the managing director's signature. The thinnest here is Callisay at 7.61%.
2. Concentration policy. No buyer above 35% of turnover. The largest here is Vintry Hall at 26.00%.
3. Capacity. No order accepted into a week already loaded. The planner signed every one against a dated grid.

Three sensible rules, applied honestly, by people who were paying attention. Then, in the nine days between 14 and 22 September, four of these seven buyers cut or delayed the part of their orders that had not yet shipped. 58.4% of the season's costed margin went with them.

Nobody broke a rule. Nobody made a bad decision. The rules were measuring the wrong thing.

An order is a decision. A book is a position.

Here is the difference the rest of this course runs on. It is worth stating plainly before any arithmetic.

An order is judged one at a time, and it is judged well. A merchandiser costs it. A planner checks the week. A credit controller checks the buyer. The managing director signs it. Everything a factory does is built to answer one question: should we take this order?

A book is what those decisions add up to, and nobody is asked to look at it. No form is filled in when an order joins the book. No meeting is held about the shape of the whole. The order book exists as a report, not as a position anybody owns. A position nobody owns is a position nobody manages.

That is not a criticism of Zerrand. Ask any factory who owns the order book and you will get a name. Ask what that person checked about it last month and you will usually get the total value and the loading percentage. Both are sums. Neither is a shape.

Three of the risks on this book already have owners

Before naming the risk that has no owner, be clear about the ones that do. A factory that has bought all three sometimes believes it has bought protection against everything.

• The goods are damaged or lost in transit. That is a cargo policy, and course 12.8 covers what it does and does not pay. Zerrand's is in place.
• The buyer takes the goods and does not pay. That is credit insurance, discounting or a documentary credit, and course 13.5 covers the products and course 13.2 the credit itself. Zerrand insures its export ledger.
• The exchange rate moves between the quotation and the money. Course 13.6 covers it. Zerrand invoices in dollars and its cost base is largely in dollars, so the exposure is small and known.

Each of these is real, and somebody will sell you cover for each of them. Now read the September event again.

Nothing was damaged. Nobody failed to pay. No rate moved. The buyers simply did not want as many jackets as they had said they wanted. They said so in writing, within their contracts, politely, all in the same nine days.

There is no policy for that. An insurer pays when a buyer cannot pay. It does not pay when a buyer does not buy. Lesson 6 comes back to that line, because it is the edge of the whole insurable world, and it is where a factory's order-book risk actually lives.

Where the money went, in one paragraph

The four cuts removed 28,500 units from the book. On those units Zerrand had already spent USD 544,043.80 of committed cost — money it could no longer get out of, because the fabric was contracted, the cloth delivered, the panels cut, the garments sewn. It got USD 227,184.27 of that back. Add the margin it will now never earn and the total loss is USD 415,568.53, against a book costed to make USD 711,218.

Here is the part that surprises people, and lesson 3 works it out properly. Only 23.8% of that loss is the margin. The other 76.2% is money already spent. People talk about the drop in demand. But the damage came from where the cloth happened to be standing on the day the calls came.

What to take away

An order book is not a list of orders. It is a position, and it can be far worse than any order in it. Acceptance rules test each order against a floor and a policy. Every rule can pass while the orders together add up to something nobody would have chosen. Three of the risks on a book have owners and insurers. The fourth — the buyer choosing not to buy — has neither, and it is the one that arrives at four buyers at once. The rest of this course is about seeing it in March instead of September.