It’s not a small-order problem: The silent crisis killing distributor profits.

The real issue isn’t small orders. It’s low-value order lines — specifically, picks that cost more to fulfill than the gross profit they generate. Shutterstock Photos.

By Randy MacLean
WayPoint Analytics

For years, distributors have blamed the “small order problem” for shrinking margins and disappearing profits.

Over time, most companies have simply accepted it as the nature of the business. But that assumption has allowed a much deeper, more damaging issue to fester unchecked — one that is quietly costing distributors millions every year.

In fact, it’s the real reason so many companies have lost their historic profit rates and are having such a difficult time getting them back.

The “small order” misnomer
For decades, everyone has been aware of the “small order problem” in distribution. Many (including myself) have studied it in detail, but any kind of action plan to effectively address it has been elusive.

Much of the thought leadership came from the early foundational work by researchers including James L. Heskett and later detailed in Lambert et al. (1983), building on case insights from Bruce Merrifield.

These papers sparked thinking that was very advanced for their time. However, the industry lacked today’s detailed line-level analytics tools. As a result, researchers misidentified the real nature of the problem.

A little more than a year ago, we tackled the issue again and took it much further. We drilled down to look at profitability at the individual pick level, using both our quantum analysis capability (looking at line-level profitability), and utilizing our enormous (hundreds of billions) pool of industry data.

We found that the real issue isn’t small orders at all. It’s low-value order lines — specifically, picks that cost more to fulfill than the gross profit they generate. These are the quiet killers of profitability. They hide inside everyday activity, making them extremely difficult to spot and even harder to fix without the right tools and strategies.

Researching the true impact
We analyzed $725 million in detailed data across 10 distributors, drilling all the way down to the individual line level. We analyzed year-over-year change to see what impact their actions were having. Our goal was simple: identify what separated the distributors that were pulling ahead from those falling behind. What we discovered brought new clarity to profit strategy and inspired powerful new analytics for our clients.

These companies weren’t edge cases. They were representative distributors across different markets and sizes, from smaller independents to large regional players. We divided them into two groups, based on whether or not they were actively addressing the small-pick issue.

Group 1: Business as usual
The first group — five companies that had not taken targeted action — showed signs of steady and significant decline:

• Average order value dropped 13.4%, falling from $81.89 to $73.34

• Pick expenses rose 8.9%, from $46.01 to $51.79

• Number of money-losing picks increased 1.6%, from 753,363 to 765,578

• Operating profit collapsed by 41.9%, dropping from $47.4 million to $27.5 million

The companies showed erosion in several metrics that drive small losses. However, the factors combined to crush profitability. In total, these five companies lost nearly $20 million in profits in just 12 months. These aren’t the kind of numbers any business can absorb for long — not in a high-cost, low-margin industry like ours.

Group 2: What happens when you act
The second group told a very different story. These five distributors took targeted action using detailed cost and profit data. The results were impressive:

• Average order value rose 19.3% (from $145.47 to $187.87)

• Pick expenses increased only 2.9% (from $98.40 to $109.53)

• Losing picks fell 29.6% (from 251,420 to 176,989)

• Profits jumped 53.8% (from $20.5 million to $31.5 million), adding more than $11 million

Surprisingly, sales for the companies in both groups were relatively steady with no significant sales growth or decline.

The Group 2 companies weren’t necessarily spending more, selling more, or working harder. They were working smarter — targeting the right accounts, tightening fulfillment dynamics, and making small, high-impact operational changes based on data.

Proof from a small distributor
And in case you’re wondering whether this only applies to large firms, consider the standout performer in our study: a $4 million distributor that used the same techniques. In just one year, they:

• Increased order value by 38.5%

• Held pick expense nearly flat, with just a 3.7% increase

• Reduced total pick count by 18.7%

• More than doubled profit, from $359,000 to $923,600 — a 157% increase in one year

Their story proves this isn’t just a strategy for the big guys. It’s about focused action, not size.

A real-world example
In one example: we looked at an invoice from a particular customer. Out of six order lines, only one produced meaningful profit — $94 on a high-value pick. (1) The other five lines, each representing low-quantity, low-value picks, were unprofitable. (2) After adding it all up, the invoice only netted $12.87 in operating profit, despite more than $1,000 in revenue. (3) The rest was wiped out by costly handling.

First invoice — money-losing, low-value items destroy profitability.

And it gets worse. A week later, the same customer placed another order with the same low-value lines — but without the one profitable item. (4) That invoice lost $76.67. (5) The two invoices produced a combined loss of $63.79. (6) The two invoices combined to produce an outright loss.

The two invoices combined to produce an outright loss.

If those two orders had been combined (7), losses on the low-value items would have been substantially reduced with increased product value sharing the picking and delivery costs (8), and the company would’ve seen a $55.09 profit (9) instead of a combined $63.79 loss. That’s a $119 swing — on just two invoices.

Combining two invoices (four days apart) eliminates duplicated picking and/ delivery cost for a significant profit gain.

In this company, the low-value picks occurred 177,352 times in one year! Now you can see the scale of the damage — and the potential for cost savings and profit gains. Collected up across a year, addressing the small pick problem is worth roughly $4.6 million in additional profits for this one mid-sized distributor!

What it means
This can’t be solved by “selling more” or “increasing margins” or any of the other old strategies that have stopped working.

Deeper research revealed these chronically unprofitable picks clustered in specific customer accounts and certain products. Even more importantly, we discovered that money-losing picks were often hidden inside orders that still looked profitable overall. That explains why efforts to fix the “small order problem” have consistently fallen short.

The shocking finding was the sheer scale of the issue. In every case, there were huge numbers of these small losses accumulating, causing millions in hidden profit drains for the companies. In all cases, this was the single largest cause of lost cash flow and lost profits.

New analyses
The first step in addressing the issue is the identify where it’s happening. What customers? What products?

We added new analytical tools so our clients could quantify the number and scale of losses internal to every customer account. We also added low-value pick analysis by product, so action plans could be developed for items that were chronically ordered in quantities too low to be profitable.

Report shows the percentage of unprofitable low-value picks for each customer account.
These are reducing profitability, even in overall profitable accounts.

Report shows percentage of picks that without sufficient gross profit value to be profitable.
It also show the net loss for the item (due to the high percentage of money-losing picks).

Tactics
Once the significant clusters of low-value picks are identified, focused action generally:

• Limits picks with very small quantities (or increases quantities for the picks)

• Stop breaking cartons

• Set minimum order quantities for the items

• Combine orders / shipments

• Reduces or eliminates costs

• VMI programs

• Increase price/margin

• On very small quantities

• On low-volume accounts

These are just a few of the more than 40 tactics that are used to restore profits lost due to low-value picks.

What the winners did differently
So, what made the difference? It wasn’t heroic sales efforts or aggressive margin hikes. The winning companies succeeded because they followed two essential steps:

First, they understood the real problem: They didn’t just accept the “small order” label. They dug deeper and uncovered the specific customer behaviors and product interactions responsible for the profit drain.

Second, they used the right analytics to focus their efforts: They pinpointed the customers and products driving losses. And once they knew where to act, they could move quickly and decisively.

The strategies they used weren’t complicated, but they were powerful:

• Identified the sources of the low-value picks (in customers and products)

• Profit-value segmentation to identify accounts that consistently produce losses

• Minimum Order Quantity (MOQ) reviews to eliminate low-value, loss-generating picks

• Increased pricing on accounts generating disproportionate levels of low-value picks

• Profit conversion analysis to see which revenue actually drives bottom-line results

• Increased penetration selling into high-conversion accounts

• Policy changes on value-adds like delivery charges — aimed to shape customer behavior

These aren’t theoretical exercises. They produce immediate, permanent improvements —and in most cases, involve no negotiation or customer pushback. Just clarity, planning, and follow-through.  And they produce permanent gains year-after-year.

Stop chasing the wrong problem
We no longer think about the “small order problem.” That’s a holdover from a time when we didn’t know any better. The real threat is small picks — order lines where the cost of service is higher than the margin value of the product. These hidden losses are happening at scale, and they’re what’s dragging down profits across the industry.

Most legacy reporting systems simply aren’t built to reveal this level of detail. They deliver high-level summaries instead of the underlying mechanics. As a result, leadership often flies blind — relying on averages, assumptions, or gut instinct. That approach may have worked when margins were high and costs were stable. It doesn’t anymore.

We need more precision. And the distributors that are using advanced analytics to look deeper are proving what’s possible. They’re cutting out unprofitable transactions. They’re reshaping customer behavior. They’re redirecting efforts to the places where profit lives.

And most importantly — they’re getting results.

If you're ready to stop guessing and start growing, it’s time to stop chasing the wrong problem — and start solving the right one. 

Harvard Papers: Heskett, James L. (or Heskett Research Group). Paper Distributors, Inc. (E): “The Small Order Problem”. Harvard Business School Case, Spring 1978; Lambert et al. (1983) "Solving the Small Order Problem" in the International Journal of Physical Distribution & Materials Management. 

About the author
Randy MacLean founded WayPoint Analytics which has been delivering detailed cost and profit analyses to distributors and manufacturers for more than 15 years.  His best-selling “Profit-Driven” book series have been a vital guide for industry executives and managers, bringing effective tactics for boosting profit rates to companies across the industry.  The WayPoint Analytics online system, and Randy’s insights and techniques are widely used, as the most successful distributors have adopted data-driven approaches to their profit strategies.  Discover more or contact Randy at www.waypointanalytics.net.