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A Better Understanding of Customer Profitability (Part 2)

    The benefit of using ABC for customer profitability is that it drives accurate analysis and provides the opportunity for cause determination. ABC takes into account the unique characteristics of a customer or the services he/she requires in order to accurately assign costs. A low cost to serve customer may have a single buying location, request full pallets shipped on full trucks with infrequent deliveries to short distances. On the other hand, a high cost to service customer may require store ready pallets, shipped LTL with frequent deliveries to long distances. (See the figure below)

     While setting and determining the rates for delivery trucks seems like a simple task with the rates expressed in cents per mile and the major cost/labor paid the same way it easy to forget how many cost drivers there are involved. Shipping and delivery of your product to your customers is much more than hauling items from one point to another. Loading and unloading, stop-offs in transit, headhaul/backhaul implications, varying pay scales, use of lease-operators and empty mile allocations all further complicate the task. This is why ABC is so important when examining all the costs that go into serving your customers!

     By understanding the true profitability of customers, derived through ABC, distributors can confidently take action to improve profitability including:

�          Rewarding customer specific teams. Many distributors have implemented customer specific teams to handle their top accounts. Access to customer profitability information will allow the company to reward team members per the profitable volume they generate rather then of the volume alone.

�          Collaboration between internal sales and operations. When sales and operations share the same "big picture" view of customer profitability, more joint strategic decision making will occur. Sales people will be less likely to sell pallet configurations and promise delivery frequencies that needlessly drive up the cost of operations.

�          SKU Pruning. While a distributor wants to satisfy all customer needs, it is impossible to profitably create and support customized versions of ever SKU. ABC focuses on true SKU profitability, identifying those versions of products/items that optimize customer satisfaction while still making money for the distributor.

     These actions alone can dramatically improve a distributor's profitability. By combining customer profitability information to drive employee incentives internally, a distributor can also foster a profitability culture inside the organization which will last for years to come.

ABC DELIVERS TRUE CUSTOMER PROFITABILITY