Issue 060 - A Better Understanding of Customer Profitability (Part I)

In this week's newsletter we are going to dive deeper into explaining how ABC can help you gain an understanding of how customer profitability works through shipping and delivery. I'd like to acknowledge a published white paper written by Jack Haedicke called "CPG Manufacturers Lead the Way in Reducing Supply Chain Costs" as sections within that article contributed to this week's newsletter.

A Better Understanding of Customer Profitability (Part I)

To remain competitive in the distribution industry, distributors and wholesales strive to offer their customers more and more value. The most successful distributors are able to provide high quality goods at low prices by eradicating costs from the supply chain. If you're a distributor that is striving to improve your customer profitability then you need a clear image of what the true cost to serve each of your customers is. By applying traditional accounting methods to your business the costs of services are leveraged across all the customers. But with Activity Based Costing (ABC) you can individualize each customer, thus enabling you to see directly the profit and loss differences between each of them. In a simpler fashion, it illustrates how doing business with one customer can often be more efficient and profitable than doing business with another.

Customer profitability shouldn't be comprised of only the profits resulting from a sale to a customer. For the clearest picture it should also take into consideration the costs of the specific activities performed for that restaurant or grocery store customer, such as shipping, and compare that to the category and company average.

Looking at the chart above you may be asking yourself, what is the basis for the delivery costs? The most accurate customer profitability should account for the customer's distance, customer pick-ups, unloading efficiency, full truck loads vs. LTL, shipping frequency and other factors of variability unique to the customer. If these variances are not taken into account (in other words, if an average shipping cost is applied across all customers) actions taken on the data can benefit the higher cost to serve customers and penalize the lower cost to serve customers which is the exact opposite effect distributors want when attempting to reduce supply chain costs. Next week's issue will show how to avoid taking actions that benefit customers that cost you more to serve and penalize the customers that cost you less.

This customer scorecard can help identify you problem areas outside of the normal P & L. ABM (Activity Based Management) helps you manage your business from a Customer perspective which is always the correct perspective.

$ IT PAYS TO UNDERSTAND PROFITABILITY $

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