Cost to Serve – Customer Profitability Analysis

Posted On : Aug 23, 2018

“A box is a box!” Those were the infamous words a manager at one of our customer facilities stated to us years ago. No matter how hard we tried, we could not convince him that a box is not a box when it comes to employee performance standards. There are big boxes, small boxes, heavy boxes, weirdly-shaped boxes – the list goes on. For every type of box, there are variances that effect the amount of labor required to work it and, thus, variances in cost.

The days of just averaging your total volume against your total labor to come up with a cost per unit are long gone. If you do not have granular cost and performance data across all your processes – by customer, equipment type, employee, product type, etc. – you will be at a serious disadvantage to competition that does. As Jeff Bezos likes to say, “Your margin is our opportunity!” Amazon is a data-driven company, and they use their data to expand into more and more verticals and eat the competition.

Data is becoming more valuable now than the product. What is a product but information imprinted into a bunch of raw materials? It is the information (data) that creates the value. You need to view your business the same way. Operations are becoming datafied, and you need to take the steps to aggregate that data into usable information about your business.

Twenty percent of customers/products make you 80% of your profits. 50% are marginally profitable or break even, and 30% actually lose you money. Do you know which and how much? If you don’t, your most profitable customers could be poached by someone armed with better data. It is important that you know your cost to serve and performance by customer, product, and employee. There are variances for each, and you need to understand them.

For example, let’s look at the process of labeling. Distribution centers that ship products to various retailers are frequently asked to label the boxes for the retailer, saving them the effort at their retail location. For one of our customers, one large retailer allowed you to put the label anywhere on the top of the box. However, a different large retailer required the label be placed in the upper right-hand corner of the top of the box, no closer than 1/2 inch from the edge and no greater than 1 inch from the edge. If the label was out of position, the retailer could reject the box and make you take it back, or, at a minimum, not pay you for the handling fee on that box. Because of the onerous cost of failing to place the label properly for that one retailer, employees were extra careful in placing the labels. We found that the cost to serve for labeling for that one retailer was 4x the labor cost of labeling for the other retailer. However our customer did not know this and charged the same standard per-box labeling fee for both customers!

Once they saw the data and realized they were losing money on each label for that one retailer, they presented the retailer with the data and were able to renegotiate rates for that specific process, turning it from a loss into a profit center.

This is an example of the power of cost to serve shed light on your operations and improve your bottom line. Another customer of ours gives our weekly cost analytics report for all processes and customers to their sales people, who use it to help negotiate prices on service delivery, thus making sure all value-added services are priced profitably.

There are many other factors that go into customer profitability analysis, such as customer service, material costs, overhead, and returns. Easy Metrics tackles the most challenging one by showing your labor cost for every process by employee, product, equipment type, and customer.

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