Customer Profitability: Do Your
Systems Track True Supply Chain Costs?
Visibility to customer profitability ensures your company knows it is not spending too much on serving some customers and not enough on serving others.
WHAT KIND OF VISIBILITY to true supply
chain costs can you achieve via
data from your systems? If you have
good visibility and access to data, what
do you do with it? One of the growing
trends in supply chain management is
customer segmentation — or segmenting
your customers based on logistics
needs. An initial step in customer segmentation
is customer profitability
analysis.
The intent is to determine who your more profitable customers and less profitable customers are and to then offer logistics services accordingly. In essence, the goal is to remove the common “one size fits all” level of service. While this one level of service practice is simple, it results in some customers being underserved and others over-served.
As a result, your company is spending too much on serving some customers and not enough on serving others, not to mention possibly alienating those whose service expectations aren’t met. Customer profitability sounds like a simple and opportunistic idea, right? However, it does require being able to determine exactly what resources within your company are consumed to serve particular customers. Can technology help you get more visibility into your costs within the supply chain?
The short answer is that it should; however, as usual, the ease with which you can find it depends on your current systems. Most costs are buried in larger categories, so that finding actual detail is more often than not very difficult. Activity-based costing (ABC) is a methodology to help assign overhead costs more efficiently to products and services based on actual resource consumption rather than averages, which aren’t as accurate. There are software packages that help implement ABC within companies; however, even without ABC, companies can get better data on customer profitability. It just may require some digging.
The following are some categories of costs and where you might find them within your systems:
Categories of Supply Chain Costs Specific to Individual Customers Freight
These costs are often easiest to find and typically allow identification of customer specific charges.
• Where to find the costs:
Freight bill data either in your system or in your carriers’ systems.
Inventory Do you have to carry specific types of or additional inventory to cover the needs of a specific customer?
• Where to find the costs: The amount of inventory and/or value of inventory is found in order management, accounting or inventory management systems.
• Must have an internally calculated inventory cost for the entire company, which doesn’t always exist. Surprisingly, many companies don’t calculate an internal cost of capital and rely on a much less accurate cost of money.
• With corporate inventory carrying cost, calculate inventory carrying cost for specific customer inventory
Storage
How much space, if any, is permanently assigned to specific customers? Is this storage at your owned facilities or at leased/outsourced facilities?
• Where to find the costs: These costs are often difficult to find in internal systems because distribution facility costs are typically averages based on total throughput in a facility rather than different products or customers requiring more or fewer resources. You might be able to determine total footprint or pallet locations designated for individual customers to determine total space and use facility data to get cost per pallet or cost per square foot.
• If you outsource distribution, these costs are easier to find because outsourcing companies often charge on a cost plus basis
Handling and Packaging
Do you have to provide special handling or packaging/labeling for specific customers?
• Where to find the costs: It is likely that you will have to perform some time studies or manual calculations to get the detail on these costs based on specific tasks performed for individual customers.
• If you outsource distribution/fulfillment or the special label, you should be able to get at the cost via the outsourced partners’ charges billed to you.
Customer Service
Do you offer 24/7 service to some or all of your customers? Does this require running or leasing a call center?
• Where to find the costs: Do you pay to have a call center managed by a third party? If the answer is yes, the costs are easier to find, just as they are for outside storage. If not, you will have to calculate the costs of the internal call center based on salaries and systems costs.
Returns
Do you have different returns policies for your customers? For example, do you have bigger returns allowances for some customers?
• Where to find the costs: Look at your returns policies overall to see whether there are procedures by individual customer and estimate what each costs. If you do have formal returns policies, make sure they are enforced to keep costs in check.
Conclusion
Knowing the detailed profitability of each customer is a key step in implementing customer segmentation. However, most companies don’t know the cost of serving each customer, so the profitability of each customer is often unknown. By delving into your current systems, you can see which customer specific costs are available and then determine where there are gaps so that you can begin to capture the necessary costs in the future. This may require some manual effort on the front end, but knowing detailed profitability for each of your customers is a worthwhile end result.