Customers profitability accounting

Our example uses the data from Bowman and Narayandas (2004). The customer firms are more than 300 industrial customers of firms that provide metal processing, fabrication, and distribution services. The customer firms are in industries that include manufacturing, construction, transportation, aerospace, and electrical. As a group, these customers use over sixty different vendors. A sponsoring vendor firm provided financial data and details of its efforts at the customer account level, enabling us to link vendor resource commitments to vendor performance and customer profitability. 

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. 

The impact was even more noticeable for the company with the one unique customer. The behavior of this customer, which accounted for 20 percent of the company s sales, caused it to incur over 50,000 in extraordinary support costs. The remaining business required only about 30,000 in such extraordinary support costs. The attribution of these costs to the one customer substantially reduced the profitability of its business with the unique customer. 

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. 

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. 

Network design models should be structured such that the resulting supply chain netwoik maximizes profits after tariffs and taxes while meeting customer service requirements. The models discussed earlier can be modified to maximize profits accounting for taxes, even when revenues are in different currencies. If is the revenue from seUing one unit in market j, the objective function of the capacitated plant location model can be modified to be... 

The company, therefore, has responsibilities, not just to its stakeholders (its owners, its customers, its employees, past and present, and, increasingly these days, to its neighbours), but it also has legal responsibilities, mainly to issue an annual report, containing a set of accounts, especially a balance sheet (for a particular point in time, usually the last day of the financial year for the company) and a profit/ loss account, describing the company s performance during that financial year. 

The assessment of internal attractiveness then looks at these companies from the suppHef s point of view. First of aU, how profitable is business with this customer Profitabihty needs to take into account aU the factors which drive margins for each individual customer, such as technical service at the customer site, cost through customization of products, services and aU pricing components and rebates as well as the synergy effects across the portfoHo - for example, the need for an outlet for any by-products, and so on. In some cases we even recommend pricing botdeneck resources, for example, sophisticated application services, at their opportunity cost... 

Arguably, e-commerce will allow chemical marketers to offer information-based solutions and customization not only to a select number of estabhshed accounts but also to a much broader range of customers in profitable growing market segments at much lower cost. GE Plastics Color Express service, for example, al-... 

Financial projections are often one of the most scrutinized aspects of an innovation Project Charter, especially when executives are trying to select which few innovation projects to fund. Almost all financial projections include estimates of revenue. Or, you can estimate profitability using Innovation Financial Management (Technique 11). Either way, the financial projections listed on the Project Charter should be estimated from the point your innovation will be available to customers, and should align with the company s current accounting periodicity (monthly, quarterly, annually). 

In many industries, the cost of purchased supplies accounts for 60-80% of production costs, so suppliers can have an important impact on an industry s profit potential. When the number of suppliers in a market is limited and substitute products are lacking, suppUers can exercise considerable power over their customers because the switching costs can be problematic and costly. 

Table 4.2 su ests that an optimal capacity is 300 units. Thus the company will forgo some of the demand when the demand is 500 units. This decision maximizes the company s expected profit. It is also clear that if the company cares about unsatisfied demand and its effect on future customer arrivals, then there has to be a mechanism to account for the cost of this unsatisfied demand—perhaps by including a goodwill cost for... 

In Demand Driven Supply Chain companies, processes are built from the outside-in, which means, they are based on a clear view of the customer, what is important for them and the requirements for account profitability. These companies become zealots on new product introductions and use their supply networks to shape and respond to demand. 

The alternative to rule-based models and allocation policy is the use of optimization-based resource allocation models. Such models can explicitly take into account variations in profitability at the customer order level, com-... 

---