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Claudia Imhoff

Welcome to my blog.

This is another means for me to communicate, educate and participate within the Business Intelligence industry. It is a perfect forum for airing opinions, thoughts, vendor and client updates, problems and questions. To maximize the blog's value, it must be a participative venue. This means I will look forward to hearing from you often, since your input is vital to the blog's success. All I ask is that you treat me, the blog, and everyone who uses it with respect.

So...check it out every week to see what is new and exciting in our ever changing BI world.

About the author >

A thought leader, visionary, and practitioner, Claudia Imhoff, Ph.D., is an internationally recognized expert on analytics, business intelligence, and the architectures to support these initiatives. Dr. Imhoff has co-authored five books on these subjects and writes articles (totaling more than 150) for technical and business magazines.

She is also the Founder of the Boulder BI Brain Trust, a consortium of independent analysts and consultants (www.BBBT.us). You can follow them on Twitter at #BBBT

Editor's Note:
More articles and resources are available in Claudia's BeyeNETWORK Expert Channel. Be sure to visit today!

 

The rule of thumb is that 20% of your customers generate 80% of your company’s revenues. These are your “most profitable” customers but are they really? Unless you are studying your cost-to-serve analytics, you may have it all wrong…

Here is the scenario – your best customer asks for certain “perks” like expedited shipping of your product, specialized labeling or customized handling. Because they are your very best customer, the sales rep has been authorized to grant these special services. But is this customer really profitable or have you just eaten up whatever profits were available by these little “giveaways”?

An article in September’s Harvard Business Review suggests the latter is actually occurring.

Here is the problem as the authors see it. Conventional accounting methods and average-cost assumptions obscure what is really going on with these customers. Sales executives often see these perks as minor concessions necessary to close the deal. Unfortunately, it is the high volume customers who get most of these services making them far less profitable than first thought.

To prove their point, the Supply Chain Executive Board analyzed 750,000 order records from three companies (from consumer products, process and electronics industries) and found that these companies were sacrificing substantial profits – up to 20 % – for only a 3-4% boost to revenue growth. Ouch!

In another analysis of customer and product profitability, it was revealed that 40% of unprofitable orders were actually placed by these supposedly “profitable” customers. And 55% of these orders were for products that are, on average, considered profitable. Double ouch!

So what should companies really look at in terms of understanding the profitability of customers and products? The article suggests that companies must use cost-to-serve analytics rather than the traditional cost-of-goods-sold analytics (which uses average costs for each product sold). Basically, these analytics use the real dollar costs to deliver a specific product to a specific customer.

In the article's example, a client (Georgia-Pacific) used this data to discover the root causes of high costs associated with their good customers. They found that the high costs were caused by last-minute, uncoordinated promotional planning and purchasing across the customer’s business units and the customer’s own unwillingness to share inventory level and positioning information.

Basically, the customer was transferring its problem(s) to the supplier and asking the supplier to pay for the customer's poor planning. "Here, let me make my problem your problem..." And since this was one of Georgia-Pacific’s “best customers”, they got away with it until they were confronted with the facts about their true profitability status. Once this occurred, the customer became quite willing to work with Georgia-Pacific to improve service and return them to the “best customer” status.

The use of actual delivered cost analytics is a big improvement over the traditional cost of goods sold averages. Not only do you uncover which of your customers are actually profitable but you now have leverage to change their bad behaviors by threatening to withhold a “favored nation” status. It may truly not be deserved. If they refuse to change their ways, your company may ultimately choose to direct these customers to your competitors!

Yours in BI success,

Claudia


Posted September 8, 2005 6:20 PM
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