Costs customer profitability

Prices. The price of commodity chemicals is based on cost of production, capital needs for expansion, and the ratio of supply to demand. Profit margins can drop under changing conditions, and unit price tends to be low. Specialty chemical prices vary widely. They are based on the value of a product or system to the customer. Profit margins can usuaHy be maintained, and unit price is higher than for commodity chemicals. 

Example 2 - Resource inputs and customer profitability. Firms invest resources in a customer relationship with the objective of earning a return on that investment. Consistent with this goal, Shapiro, Rangan, Moriarty, and Ross (1987) develop the price versus cost-to-serve (which includes pre-sale, order-related, distribution, and postsale service costs) framework, which links vendor investments to the returns from each customer relationship. This relationship, however, is not a simple one efforts to find a strong correlation between vendor investments in a relationship (as measured by cost-to-serve) and returns (i.e. price paid by the customer) typically fail. Shapiro, Rangan, Moriarty, and Ross (1987) interpret this as evidence that high income does not necessarily mean high cost-to-serve. And nor does low income necessarily mean low cost-to-serve. 

To utilize the framework with our data, we first classified each customer s price (high versus low) and cost-to-serve (high versus low) using median splits. We compared the means across the resulting four groups on customer profitability, size, share of wallet, satisfaction with vendor performance, satisfaction with competitor performance, and propensity to share costs. The results are provided in Table 11.4. 

An explicit understanding of historical and expected customer profitability by product and by transaction, with a forward-looking view on raw material costs. 

In addition to customer profitability tools at the transaction level, additional tools will need to be implemented and delivered to the accountable individuals in areas such as customer segmentation, target margin setting, contract terms policies, raw material cost movement expectations, and customer/product mix optimization. 

Design data and other process information are obtained during the development stage. This information is used as the basis for carrying out the additional phases of the design project. A complete market analysis is made, and samples of the final product are sent to prospective customers to determine if the product is satisfactory and if there is a reasonable sales potential. Capital-cost estimates for the proposed plant are made. Probable returns on the required investment are determined, and a complete cost-and-profit analysis of the process is developed. 

DSAM decisions concerning specific assets or asset groups are, in general, of a multi-criteria nature. Because of the role electricity infrastructure has in the society, and because of regulatory pressure, distribution companies must balance economy (costs and profits) against reliabihly, quality of supply, personnel safety and other aspects. In other words an asset or network failure might lead to more or less critical incidents with consequences for the company and customers, personnel or third party safety, etc. 

First order fit between the activity and strategic theme. In the activity map, activity costing fits the notion of measuring contribution on different pieces of the business. Its application is as an internal control to evaluate product and customer profitability. Product R D is another example of first-order fit. The Product R D activity supports the Technical Leadership theme. 

Companies can define themselves by the type of customer they seek to service. For this purpose, the customer profitability matrix provides four categories. It requires detailed cost analysis and allocation of indirect costs for all customer segments. This encompasses pre-sale costs (location, need for customisation, etc), production costs, distribution costs, and after-sale service costs. The actual prices charged to different customer segments are subsequently assessed, together with the volume consumed over time and its value. The matrix (Figure 2.4) has net price on the vertical axis, and cost on the horizontal, and is divided into four quadrants ... 

Fig. 1. Costs and profit margins for molders. Source Facts Figures of the US Plastics Industry, published yearly by The Society of the Plastics Industry, Inc. Includes custom and proprietary molders PBT = profits before taxes.

Faults Specific to the Operation. Fault types may be detected that are not typical of the industry or competition. It can be difficult to assess this type of situation accurately because data commonly available from the customer, alternative vendor, or competitor are likely to be narrow or biased. It may be better to analyze fault types specific to an operation in terms of cost or profitability. Are certain product types profitable to manufacture What would be the cost to make them profitable ... 

This chapter describes tire problem of cost visibility we addressed in Chapters 24 and 25. Plumbco faces a situation we find increasingly common. Its operations include heavy elements of both manufacturing and distribution, but its methods for determining product and customer profitability were outdated. The case study shows how company management can expeditiously get a handle on profitability for decision making. 

The appropriate measure should be profit rather than sales revenue or volume. The reason for this is that revenue and volume measures might disguise considerable variation in costs. In the case of customers this cost is the cost to serve , and we will later suggest an approach to measuring customer profitability. In the case of product protitability we must also be careful that we are identifying the appropriate service-related costs as they differ by product. One of the problems here is that conventional accounting methods do not help in the identification of these costs. 

One of the basic questions that conventional accounting procedures have difficulty answering is How profitable is this customer compared to another Usually customer profitability is only calculated at the level of gross profit - in other words the net sales revenue generated by the customer in a period, less the cost of goods sold for the actual product mix purchased, However, there are still many other costs to take into account before the real profitability of an individual customer can be exposed. The same is true if we seek to identify the relative profitability of different market segments or distribution channels. 

As Table 3.1 highlights, there are many costs that need to be identified if customer profitability is to be accurately measured. 

The best measure of customer profitability is to ask the question What costs would I avoid and what revenues would I lose if I lost this customer This is the concept of avoidable costs and incremental revenue. Using this principle helps circumvent the problems that arise when fixed costs are allocated against individual customers. 

Ideally the organisation should seek to develop an accounting system that would routinely collect and analyse data on customer profitability. Unfortunately most accounting systems are product focused rather than customer focused. Likewise cost reporting is traditionally on a functional basis rather than a customer basis. So, for example, we know the costs of the transport function as a whole or the costs of making a particular product but what we do not know are the costs of delivering a specific mix of products to a particular customer. 

An application of logistics cost analysis that has gained widespread acceptance, particularly in the retail industry, is a technique known as direct product profitability - or more simply DPP . In essence it is somewhat analogous to customer profitability analysis in that it attempts to identify all the costs that attach to a product or an order as it moves through the distribution channel. 

With the aforementioned revenues and costs, a profit fimction can be obtained. However, this is not an exact accounting profit but a representation of a profit according to the costs and revenue factors that affect the decisions to be made by the model presented in this study. This function is only used to obtain the best arrangement of customers and distributors in the supply chain so that "profit" can be maximized. 

---